LATTER-DAY    PROBLEMS 


BOOKS  BY  J.  LAURENCE  LAUGHLIN 
PUBLISHED  BY  CHARLES  SCRIBNER'S  SONS 

Latter-Day  Problems net  f  1.50 

Industrial  America net  $1.25 

The  Principles  of  Money net  $3.00 


LATTER-DAY  PROBLEMS 


BY 
J.  LAURENCE  LAUGHLIN,  Ph.D. 

Professor  of  Political  Economy  in  the 
University  of  Chicago 


NEW    YORK 

CHARLES    SCRIBNER'S    SONS 
1909 


COPYRIGHT,  1909,  BIT 
CHARLES  SCRIBNER'S  SONS 

Published  October,  igog 


TO 

M.  E.  L. 


PREFACE 

No  apology  ought  to  be  made  for  presenting  to 
the  lay  public  a  series  of  studies  on  the  economic 
subjects  which  have  been  pressing  on  our  attention 
for  solution  in  these  latter  days.  It  is  certainly 
one  of  the  most  important  duties  of  the  economist 
to  present  the  results  of  scientific  work  in  such 
untechnical  language  that  they  may  be  understood 
by  all.  Indeed,  this  duty  is  the  more  required  in 
these  times  when  the  metaphysical  language  of 
most  recent  economic  treatises  makes  them  sealed 
books  to  all  but  a  very  few  experts.  But,  whatever 
the  attempt  at  clearness  and  simplicity  of  statement, 
it  need  not  follow  that  the  exposition  should  have 
no  scientific  value  to  the  economic  student;  for, 
so  far  as  the  author  has  been  able,  an  understand- 
ing of  the  fundamental  principles  of  economic  dis- 
tribution has  been  brought  to  the  analysis  of  these 
questions  of  the  day.  Obviously,  many  allied 
considerations  have  been  necessarily  omitted  in 
order  to  bring  the  main  points  at  issue  into  dis- 
tinct relief,  and  to  secure  that  brevity  which  would 
assure  a  reading  by  the  busy  man;  but  clearness 
and  brevity  could  be  arrived  at  only  by  an  insist- 

vii 


PREFACE 

ence  on  the  application  of  general  principles  to 
the  apparently  confusing  facts  of  a  modern  problem. 

Consequently,  in  the  first  six  chapters,  for  in- 
stance, a  consistent  system  of  economic  analysis 
ought  to  appear  throughout  the  seemingly  various 
topics.  They  deal  with  the  methods  to  be  applied 
for  an  improvement  in  the  condition  of  those 
classes  which  have  the  least  of  this  world's  goods, 
and  which  most  appeal  to  our  sympathies  and 
assistance.  Economics  is  not  to  be  regarded  as  an 
end  in  itself,  but  as  a  means  by  which  our  social 
conditions  may  be  most  thoroughly  analyzed,  to 
the  end  that  the  less  fortunate  shall  be  most  effi- 
ciently aided  and  obtain  permanent  improvement. 
Everything  should  be  welcomed  which  offers 
methods  of  treatment  able  to  relieve  us  from  the 
disappointing  conclusion  that,  after  untold  efforts 
of  mind  and  duty,  we  should,  fifty  years  from  now, 
be  applying  the  same  unsuccessful  policies  to  only 
a  larger  number  of  persons  in  need  of  help.  For 
this  general  purpose  these  chapters  have  been  pre- 
pared; but  no  claim,  of  course,  is  made  to  ex- 
haustive completeness  of  statement.  In  addition, 
it  has  seemed  high  time  to  try  to  dispose  of  the 
superficial  impression  that  the  scientific  results 
of  economics  are  out  of  harmony  with  the  funda- 
mental teachings  of  Christianity  and  ethics. 

While  examining  the  general  subject  of  value 
viii 


PREFACE 

my  attention  was  drawn  to  the  valuation  of  rail- 
ways, and  the  chapter  in  this  volume  on  that 
comparatively  unstudied  subject  was  the  result  of 
an  attempt  to  apply  general  principles  to  concrete 
conditions.  The  question  of  insurance  of  deposits 
has  entered  into  our  politics,  and  been  adopted 
in  several  States.  As  the  studies  on  that  subject 
have  been  asked  for  and  circulated  in  consider- 
able quantities  in  some  States,  it  has  seemed  well 
to  add  them  to  this  collection  in  book  form. 
Thus,  with  the  discussion  of  government  and 
bank-notes,  the  later  chapters  must  appeal  most 
to  the  banking  public,  while  the  earlier  chapters 
appeal  to  the  wider  constituency  who  wish  to  help 
the  poor  to  a  higher  level  of  comfort. 

I  am  under  obligations  to  the  Atlantic  Monthly, 
Scribner's  Magazine,  and  the  Journal  of  Political 
Economy  for  the  right  to  print  some  of  these 
chapters  in  book  form. 

J.  LAURENCE  LAUGHLIN. 


IX 


CONTENTS 

CHAPTER  PAGE 

I.    THE  HOPE  FOR  LABOR  UNIONS    ....  i 

II.    SOCIALISM  A  PHILOSOPHY  OP  FAILURE    .    .  25 

III.  THE  ABOLITION  OF  POVERTY 56 

IV.  SOCIAL  SETTLEMENTS 88 

V.    POLITICAL  ECONOMY  AND  CHRISTIANITY     .  120 

VI.    LARGE  FORTUNES 155 

VII.    THE  VALUATION  OF  RAILWAYS      ....  177 

VIII.    GUARANTY  OF  BANK  DEPOSITS     ....  205 

IX.    THE  DEPOSITOR  AND  THE  BANK  ....  238 

X.    GOVERNMENT  vs.  BANK  ISSUES     ....  273 

INDEX 299 


LATTER-DAY  PROBLEMS 

CHAPTER  I 
THE  HOPE  FOR  LABOR  UNIONS 


THE  difficulties  constantly  arising  between  em- 
ployers and  employees  and  the  increasingly 
aggressive  interference  of  labor  unions  with  indus- 
trial operations  have  brought  the  labor  problem  to 
the  front  as  never  before.  Here  is  a  matter  directly 
touching  the  public  welfare  which  cannot  be 
blinked;  it  must  be  squarely  met  and  its  solution 
must  be  worked  out  on  a  sound  economic  basis,  or 
we  shall  never  reach  any  substantial  results. 
More  than  this,  whatever  our  solution,  and  even  if 
we  arrive  at  positive  truth,  we  shall  yet  have  to 
face  the  difficulties  of  a  suspicious  mind  on  the 
part  of  those  whose  preconceptions  differ  from  our 
conclusions.  Indeed,  one  of  the  most  serious  duties 
of  practical  economists  is  so  to  wing  the  truth  by 
publicity  that  it  may  enter  the  thinking  of  all  classes 
and  conditions  of  men. 

i 


LATTER-DAY  PROBLEMS 

To  this  end,  it  will  be  worth  our  while  to  examine 
the  principles  and  practice  of  labor  unions  solely  in 
the  interest  of  the  men  who  make  up  their  member- 
ship. We  may  leave  the  employer  out  of  account 
in  this  study,  if  for  no  other  reason  than  that  he  is 
the  one  who,  by  situation,  intelligence,  and  experi- 
ence, is  generally  able  to  care  for  himself.  This 
reason,  obviously,  does  not  apply  to  the  receiver  of 
wages,  who  is  now  using  the  union  as  an  organiza- 
tion for  raising  his  wages  as  well  as  for  lessening  the 
duration  and  improving  the  conditions  of  his  daily 
toil.  First  of  all,  it  should  be  understood  that  we 
make  no  objection  to  organized  unions.  They 
have  their  unmistakable  advantages,  as  well  as 
their  disadvantages.  The  friend  of  the  workman 
certainly  should  wish  to  study  how  to  increase  the 
gains  and  diminish  the  losses  from  unions.  In  this 
spirit  it  ought  to  be  possible  to  study  impartially 
and  honestly  any  and  all  defects  in  the  principles  on 
which  labor  unions  are  based.  If  the  defects  dis- 
closed are  obvious  and  important,  then  it  would  be 
stupid  for  society  to  ignore  them;  and  the  econo- 
mist may  be  rightly  called  upon,  as  a  consequence, 
to  propose  a  constructive  means  for  remedying  the 
shortcomings  of  the  unions  to  the  end  that  their 
efficiency  may  be  increased.  Beginning  first  with 


THE  HOPE  FOR  LABOR  UNIONS 

a  critical  analysis  of  the  present  policy  of  the  main 
body  of  labor  unionists,  it  will  be  my  purpose  to 
follow  this  with  a  constructive  plan  by  which  the 
laborers  may  improve  their  condition  through  the 
agency  of  the  unions. 

n 

Accepting  the  aims  of  the  labor  organizations  as 
above  described,  what  are  the  means  used  to  accom- 
plish these  aims  ?  With  this  purpose  all  of  us  who 
are  human  must  sympathize;  all  of  us  wish  to  see 
poverty  reduced  and  the  wages  of  the  worker 
raised.  There  can  be  no  disagreement  on  this 
point.  The  real  question  at  issue,  however,  is, 
How  can  these  results  be  brought  about  ?  On  this 
point,  it  ought  not  to  be  necessary  to  say  that  we 
must  divest  ourselves  of  all  stubborn  pride  of  opin- 
ion, and  look  the  facts  squarely  in  the  face.  Nor 
can  any  system  of  ethics  be  maintained  for  a  mo- 
ment which,  although  based  on  sympathy,  is  not 
founded  securely  upon  sound  economic  principles. 
If  the  unions  also  have  built  up  a  theory  of  class 
ethics  which  aims  to  justify  conduct  squarely  op- 
posed to  the  established  order  of  society,  and  a  con- 
duct based  on  mistaken  economic  theory,  then  that 
code  of  ethics  must  go  to  the  wall.  Moreover,  it 

3 


LATTER-DAY  PROBLEMS 

will,  in  that  case,  be  to  the  permanent  good  of  the 
workers  that  it  should  give  way  to  some  other  code. 

What,  then,  are  the  means  adopted  by  the  unions 
to  raise  wages?  Obviously,  it  is  not  possible  to 
predicate  in  one  statement  what  is  true  of  all  unions. 
There  are  many  differing  practical  policies  in  force; 
and  yet  it  is  possible  to  indicate  the  one  common 
economic  principle  underlying  the  action  of  the 
majority  of  the  large  and  influential  organizations. 
To  be  brief,  the  practical  policy  of  labor  unions  is 
based  on  the  principle  of  a  monopoly  of  the  supply 
of  laborers  in  a  given  occupation.  By  combina- 
tion also  the  gain  of  collective  bargaining  is  ob- 
tained. Just  as  manufacturers  attempt  to  control 
the  supply  and  the  price  of  an  article,  so  the  unions 
attempt  to  fix  the  rate  of  wages  by  controlling  the 
number  of  possible  competitors  for  hire.  It  would 
seem  that  what  is  sauce  for  the  goose  should  be 
sauce  for  the  gander. 

The  principle  of  monopoly,  it  should  be  observed, 
is  effective  in  regulating  price  only  if  the  monopoly 
is  fairly  complete;  it  must  include  practically  all  of 
the  supply.  But  even  under  these  conditions  the 
price  cannot  be  settled  alone  by  those  who  control 
the  supply.  The  demand  of  those  who  buy  is 
equally  necessary  to  the  outcome.  As  a  rule,  the 

4 


THE  HOPE  FOR  LABOR  UNIONS 

monopolistic  seller  must  set  a  price  which  will  in- 
duce the  demand  to  take  off  the  whole  supply. 
Too  high  a  price  will  lessen  consumption  and  lessen 
demand. 

In  a  similar  way,  not  only  must  there  be  an  active 
demand  for  labor  from  employers,  but  to  fix  the 
price  of  labor  a  union  must  control  practically  all  of 
a  given  kind  of  labor.  Here  we  find  the  pivotal 
difficulty  in  the  policy  of  the  unions;  and  we  find 
clashes  of  opinion  as  to  the  facts.  If  the  union  does 
not  contain  all  the  persons  competing  for  the  given 
kind  of  work,  then  its  theory  of  monopoly  will  be  a 
failure  in  practice.  In  fact,  the  unions  composed 
of  unskilled  laborers,  such  as  teamsters,  can  never 
include  all  the  persons,  near  and  far,  capable  of 
competing  for  their  positions.  The  principle  of 
monopoly  cannot  be  made  to  work  successfully  in 
such  unions. 

But  it  will  be  objected  by  union  leaders  that  it  is 
their  policy  to  gather  every  laborer  into  the  union, 
and  thus  eventually  control  all  the  supply  in  an  in- 
vincible monopoly.  The  unions,  however,  do  not, 
in  fact,  admit  all  comers.  Some  of  them,  such  as  the 
machinists,  admirably  demand  skill  as  a  prerequisite 
of  admission ;  others,  such  as  telegraphers,  make  the 
admission  of  apprentices  practically  impossible; 

5 


LATTER-DAY  PROBLEMS 

while  others  again,  like  some  woodworkers,  find 
difficulty  in  getting  apprentices,  and  consequently 
urge  training  in  the  public  schools.  In  such 
variety  of  practice  there,  nevertheless,  emerges  the 
fact  that  many  unions  try  to  create  an  artificial 
monopoly  by  excluding  others,  and  yet  try  to  keep 
the  union  scale  of  wages  by  preventing  in  various 
ways  the  employment  of  non-union  men.  On  the 
other  hand,  should  the  unions  adopt  the  plan  of 
admitting  all  who  apply,  then  all  laborers  being 
unionists,  the  situation  would  be  the  same  as  re- 
gards supply  as  if  there  were  no  unions.  Could 
the  unions  then  maintain  a  "union  scale "  of  wages  ? 
Evidently,  if  the  whole  supply  of  laborers  is  thus 
introduced  into  the  field  of  employment,  then  the 
rate  of  wages  for  all  in  any  one  occupation  can 
never  be  more  than  that  rate  which  will  warrant  the 
employment  of  all — that  is,  the  market  rate  of 
wages.  Although  all  laborers  are  included  in  the 
unions,  they  would  have  the  advantages,  whatever 
they  may  be,  of  collective  bargaining.  Yet  if  the 
unions  really  believe  that  when  every  laborer  is 
inside  the  union  collective  bargaining  can  of  itself, 
irrespective  of  the  supply,  raise  the  rate  of  wages, 
they  are  doomed  to  disappointment.  Wholly  aside 
from  the  influence  of  demand,  in  order  to  control 

6 


THE  HOPE  FOR  LABOR  UNIONS 

the  rate  of  wages,  the  unions  which  include  all 
laborers  must  effectually  control  immigration  and 
the  rate  of  births.  No  one,  it  scarcely  need  be  said, 
is  so  ignorant  of  economic  history  as  to  believe  that 
such  a  control  over  births  can  be  maintained. 
There  is  little  hope  for  higher  wages  by  this  method 
of  action. 

In  the  anthracite-coal  regions,  for  instance,  it 
may  be  said  that  strenuous  efforts  were  made  to 
force  all  the  men  to  join  the  unions.  If  not  only 
those  on  the  ground,  but  all  newcomers,  are  ad- 
mitted to  membership,  then  not  all  unionists  can 
find  employment  in  the  mines.  At  the  best,  if  they 
can  fix  the  rate  of  wages  which  employers  must  pay 
those  who  do  work,  some  will  remain  unemployed. 
In  such  a  case,  the  working  members  must  support 
the  idle — which  is  equivalent  to  a  reduction  of  the 
wages  of  those  who  work — or  the  unemployed  must 
seek  work  elsewhere.  Sooner  or  later,  for  men 
capable  of  doing  a  particular  sort  of  work  an  ad- 
justment as  a  whole  between  the  demand  for  labor- 
ers and  the  supply  of  them  must  be  reached  on  the 
basis  of  a  market  rate. 

Whatever  the  reasons,  the  fact  is  to-day  unmis- 
takable that  the  unions  include  only  a  small  frac- 
tion of  the  total  body  of  laborers.  In  spite  of  the 

7 


LATTER-DAY  PROBLEMS 

proclaimed  intention  to  include  in  a  union  each 
worker  of  every  occupation,  and  then  to  federate  all 
the  unions,  the  unions  contain  far  less  than  a  majority 
of  the  working  force  of  the  country.  To  the  present 
time,  therefore,  the  practical  policy  of  the  unions 
has  resulted  in  one  of  artificial  monopoly;  that  is,  not 
able  to  control  the  whole  supply,  the  union  attempts 
to  fix  a  " union  scale"  and  maintain  only  its  own 
members  at  work.  This  situation,  consequently, 
means  always  and  inevitably  the  existence  of  non- 
union men,  against  whom  warfare  must  be  waged. 
Under  this  system  high  wages  for  some  can  be  ob- 
tained only  by  the  sacrifice  of  others  outside  the 
union.  The  economic  means  chosen  by  the  unions, 
then,  to  gain  higher  wages  are  practicable  only  for 
a  part  of  the  labor  body,  and  then  only  provided  all 
other  competitors  can  be  driven  from  the  field.  The 
policy  of  artificial  monopoly  being,  thus,  the  com- 
mon principle  of  a  great  majority  of  unions,  we 
may  next  briefly  consider  the  inevitable  conse- 
quences of  such  a  policy. 

i.  The  immediate  corollary  of  the  union  policy 
is  a  warfare  a  entrance  against  non-union  men. 
This  hostility  against  brother  workers  is  excused  on 
the  ground  that  it  is  the  only  means  of  keeping  up 
the  "union  scale "  of  wages.  Although  an  artificial 

8 


THE  HOPE  FOR  LABOR  UNIONS 

monopoly  is  unjust  and  selfish,  and  certain  to  end 
in  failure,  the  unions  have  doggedly  adhered  to  it 
so  far  as  to  create  a  code  of  ethics  which  justifies 
any  act  which  will  preserve  the  monopoly.  This 
is  the  reason  why  a  non-union  man  seeking  work 
is  regarded  as  a  traitor  to  his  class,  when  in  real- 
ity he  is  a  traitor  to  an  insufficient  economic  prin- 
ciple. As  a  human  being  he  has  the  same  right 
to  live  and  work  as  any  other,  whether  a  member 
of  a  union  or  not.  The  arrogance  of  unionism  in 
ruling  on  the  fundamentals  of  human  liberty, 
the  assumption  of  infallibility  and  superiority  to 
institutions  which  have  been  won  only  by  cen- 
turies of  political  sacrifice  and  effort,  is  some- 
thing supernal — something  to  be  resented  by 
every  lover  of  liberty.  Unionism,  if  unjust  to 
other  men,  cannot  stand. 

2.  Since  the  "union  scale"  of  an  artificial  mo- 
nopoly is  clearly  not  the  market  rate  of  wages,  the 
maintenance  of  the  former  can  be  perpetuated  only 
by  limiting  the  supply  to  the  members  of  the  union. 
The  only  means  of  keeping  non-union  men  from 
competition  is  force.  Consequently,  the  inevitable 
outcome  of  the  present  policy  of  many  labor  organi- 
zations is  lawlessness  and  an  array  of  power  against 
the  state.  Their  policy  being  what  it  is,  their  pur- 

9 


LATTER-DAY  PROBLEMS 

poses  can  be  successfully  carried  out  only  by  force, 
and  by  denying  to  outsiders  the  privileges  of 
equality  and  liberty.  Sometimes  the  means  of  en- 
forcing their  unenacted  views  is  known  as  "peace- 
ful picketing";  but  this  is  only  a  mask  for  threats 
of  violence.  In  fact,  intimidation  of  all  kinds  up  to 
actual  murder  has  been  employed  to  drive  non- 
union competitors  out  of  the  labor  market.  Pick- 
eting, boycotts,  breaking  heads,  slugging,  murder, 
— all  outrages  against  law  and  order,  against 
a  government  of  liberty  and  equality — are  the 
necessary  consequences  of  the  existing  beliefs 
of  unionists,  and  they  cannot  gain  their  ends 
without  them.  So  long  as  the  unions  adhere  to 
their  present  principles  so  long  will  they  be 
driven  to  defy  the  majesty  of  the  law,  and  work 
to  subvert  a  proper  respect  for  the  orderly  con- 
duct of  government. 

The  dictum  of  a  few  men  in  a  union  has  been  set 
above  the  equality  of  men  before  the  law.  The 
union  lays  down  an  ethical  proposition,  and  by  its 
own  agencies  sets  itself  to  apply  it  at  any  and  all 
cost.  This  is  a  method  of  tyranny  and  not  of 
liberty.  The  right  of  the  humblest  person  to  be 
protected  in  his  life  and  property  is  the  very  corner- 
stone of  free  government.  It  means  more  for  the 

10 


THE  HOPE  FOR  LABOR  UNIONS 

weak  than  for  the  strong.  Therefore  the  opinions 
of  a  loosely  constituted  body,  representing  a  limited 
set  of  interests,  should  not — and  will  not — be 
allowed  to  assume  a  power  greater  than  the  polit- 
ical liberty  for  all,  rich  or  poor,  which  has  been 
a  thousand  years  in  the  making.  By  the  abuses 
of  unionism  there  has  been  set  up  an  imperium 
in  imperio — one  inconsistent  with  the  other.  One 
or  the  other  must  give  way.  Which  one  it  shall 
be  no  one  can  doubt.  The  dictum  of  rioters  will 
never  be  allowed  by  modern  society  to  eradicate 
the  beneficent  results  which  have  issued  from 
the  long  evolution  of  civil  liberty.  If  the  plat- 
form of  the  unions  is  opposed  to  the  funda- 
mentals of  law  and  progress,  it  must  yield  to  the 
inevitable  and  be  reconstructed  on  correct  prin- 
ciples of  economics  and  justice. 

3.  The  labor  leaders,  finding  themselves  opposed 
by  the  strong  forces  of  society,  have  at  times  made 
use  of  politics.  They  have  sought  to  influence 
executive  action  in  their  favor.  Mayors  of  cities 
are  under  pressure  not  to  use  the  police  to  maintain 
order  when  strikers  are  intimidating  non-union 
men.  More  than  that,  since  the  presence  of  sol- 
diers would  secure  safety  from  force  to  non-union 
workers,  union  leaders  have  urged  governors,  and 

ii 


LATTER-DAY  PROBLEMS 

even  the  President  of  the  United  States,  to  refrain 
from  sending  troops  to  points  where  disorderly 
strikes  are  in  operation.  Not  only  the  police  and 
the  soldiery,  but  even  the  courts,  when  used 
solely  to  enforce  the  law  as  created  by  the  ma- 
jority of  voters,  have  been  conspicuously  at- 
tacked as  the  enemies  of  "organized  labor." 
The  hostility  of  these  agencies  in  truth  is  not 
toward  labor,  or  its  organization,  but  toward 
the  perverse  and  misguided  policy  adopted  by 
the  labor  leaders. 

The  entry  of  unions  into  politics,  in  general,  is  a 
sign  of  sound  growth.  It  is,  at  least,  a  recognition 
that  the  only  legitimate  way  of  enforcing  their  opin- 
ions upon  others  is  by  getting  them  incorporated 
into  law  by  constitutional  means.  And  yet  legisla- 
tion in  favor  of  special  interests  will  be  met  by  the 
demand  of  equal  treatment  for  all  other  interests 
concerned;  and  in  this  arena  the  battle  must  be 
fought  out.  The  unions  will  not  have  their  own 
way  by  any  means.  So  far  as  concerns  the  rate  of 
wages,  in  any  event,  political  agitation  and  legisla- 
tion can  do  little.  The  forces  governing  the  de- 
mand and  supply  of  labor  are  beyond  the  control 
of  legislation.  But  other  subjects  of  labor  legisla- 
tion have  been  introduced,  as  is  well  known,  such 

12 


THE  HOPE  FOR  LABOR  UNIONS 

as  eight-hour  laws,  high  wages  for  state  employees, 
and  demands  for  employment  by  the  Government 
of  only  union  men.  All  these  efforts  would  be 
largely  unnecessary  were  the  action  of  the  unions 
founded  on  another  principle  than  monopoly. 

4.  The  difficulties  arising  from  this  incorrect 
policy  of  artificial  monopoly  of  the  labor  supply 
have  been  felt  by  the  unions,  but  they  have  not  been 
assigned  to  their  true  cause.  Believing  in  this 
theory,  even  though  incorrect,  they  have  gone  on 
enforcing  their  demands  by  methods  unrelated  to 
the  real  causes  at  work.  They  have  tried  to 
strengthen  their  position  by  claiming  a  share  in  the 
ownership  of  the  establishment  in  which  they  work, 
or  a  right  of  property  in  the  product  they  produce, 
or  a  part  in  the  business  management  of  the  concern 
which  employs  them.  They  have  tried  to  say  who 
shall  be  hired,  who  dismissed,  where  materials  shall 
be  bought,  by  whom  goods  shall  be  carried  or  sold, 
and  the  like.  Their  purpose  is  not  always  clear; 
but  it  seems  to  be  a  part  of  a  plan  to  keep  the  em- 
ployer at  their  mercy,  and  thus  under  the  necessity 
of  submitting  to  any  and  all  demands  as  regards 
wages. 

In  this  matter  the  unions  cannot  succeed.  The 
very  essence  of  a  defined  rate  of  wages  is  that  the 

13 


LATTER-DAY  PROBLEMS 

laborer  contracts  himself  out  of  all  risk.  If  the 
workman  claims  to  be  a  partner  in  the  commercial 
enterprise,  asking  in  addition  a  part  of  the  gains, 
he  must  also  be  willing  to  share  the  losses.  This 
is  obviously  impossible  for  the  ordinary  working 
man.  Hired  labor  and  narrow  means  go  together. 
Capital  can,  labor  cannot,  wait  without  serious  loss. 
Laborers,  therefore,  cannot  take  the  risks  of  in- 
dustry and  assume  the  familiar  losses  of  business. 
This  is  the  full  and  conclusive  reason  why  the 
laborer  contracts  himself  out  of  risk  and  accepts  a 
definite  rate  of  wages.  If  he  does  this,  he  is 
estopped,  both  morally  and  legally,  from  further 
proprietary  claims  on  the  product  or  on  the  estab- 
lishment. 

By  way  of  resume,  it  is  to  be  seen  that  the  attempt 
to  increase  the  income  of  labor  on  the  unionist  prin- 
ciple of  a  limitation  of  competitors  has  led  into  an 
impasse,  where  further  progress  is  blocked  by  the 
following  evils: 

1.  The  wrong  to  non-union  men. 

2.  The  defiance  of  the   established   order  of 
society. 

3.  A  futile  resort  to  legislation. 

4.  The  interference  with  the  employer's  man- 
agement. 

14 


THE  HOPE  FOR  LABOR  UNIONS 

ra 

In  contrast  with  the  existing  policy,  which  can 
end  only  in  discouragement  and  failure,  permit  me, 
wholly  in  the  interest  of  the  membership  of  the 
unions,  to  suggest  another  policy  which  will  cer- 
tainly end  in  higher  wages  and  open  a  road  to 
permanent  progress  for  all  working  men.  In- 
stead of  the  principle  of  monopoly  of  compet- 
itors, I  offer  the  principle  of  productivity  or 
efficiency,  as  a  basis  on  which  the  action  of 
unions  should  be  founded. 

By  productivity  is  meant  the  practical  ability  to 
add  to  the  product  turned  out  in  any  industry. 
The  relative  productivity  of  labor  operates  on  its 
price  just  as  does  utility  on  the  price  of  any  staple 
article — improve  the  quality  of  it  and  you  increase 
the  demand  for  it.  This  general  truth  is  nothing 
new.  The  purchaser  of  a  horse  will  pay  more  for  a 
good  horse  than  for  a  poor  one.  A  coat  made  of 
good  material  will  sell  for  more  than  one  made  of 
poor  material.  Why  ?  Because  it  yields  more  utility, 
or  satisfaction,  to  the  purchaser.  In  the  same  way, 
if  the  utility  of  the  labor  to  the  employer  is  in- 
creased, it  will  be  more  desired;  that  is,  if  the 
laborer  yields  more  of  that  for  which  the  employer 

15 


LATTER-DAY  PROBLEMS 

hires  labor,  the  employer  will  pay  more  for  it,  on 
purely  commercial  grounds. 

Now  it  happens  that  where  productivity  is  low — 
that  is,  where  men  are  generally  unskilled — the 
supply  is  quite  beyond  the  demand  for  that  kind  of 
labor.  Productivity  being  given,  supply  regulates 
the  price.  Obviously,  to  escape  from  the  thraldom 
of  an  oversupply  of  labor  in  any  given  class,  or  occu- 
pation, the  laborer  must  improve  his  efficiency. 
That  is  another  way  of  saying  that,  if  he  trains  him- 
self and  acquires  skill,  he  moves  up  into  a  higher 
and  less  crowded  class  of  labor.  The  effect  on 
wages  is  twofold:  (i)  he  is  now  in  a  group  where 
the  supply  is  relatively  less  to  demand  than  before ; 
and  (2)  his  utility  as  a  laborer  to  the  employer  is 
greater,  and  acts  to  increase  the  demand  for  his 
services.  Productivity,  therefore,  is  the  one  sure 
method  of  escape  from  the  depressing  effects  on 
wages  of  an  oversupply  of  labor. 

It  is  unnecessary  to  describe  in  detail  the  forms 
by  which  productivity  shows  itself  in  the  concrete. 
If  the  laborer  is  a  teamster,  he  can  improve  in  so- 
briety, punctuality,  knowledge  of  horses,  skill  in 
driving,  improved  methods  of  loading  and  unload- 
ing, avoidance  of  delays,  and  in  scrupulous  honesty. 
If,  moreover,  he  studies  his  employer's  business  and 

16 


THE  HOPE  FOR  LABOR  UNIONS 

consults  his  interest — instead  of  studying  how  to 
put  him  at  a  disadvantage,  or  instead  of  making 
work — he  still  further  increases  his  productivity 
and  value  to  his  employer.  In  other  occupations 
and  in  other  grades  of  work  the  process  is  simple. 
In  fact,  it  is  the  ordinary  influence  of  skill  on  wages; 
and  men  have  been  acting  on  an  understanding  of 
it  time  out  of  mind. 

To  this  suggestion  it  may  be  objected  that  the 
workman  who  makes  himself  more  efficient  re- 
ceives no  more  from  an  employer  than  the  less 
efficient;  that  employers  treat  all  alike  and  are  un- 
willing to  recognize  skill.  The  fact  is  doubted; 
for  it  is  incredible  that  intelligent  managers  should 
be  for  any  length  of  time  blind  to  their  own  self- 
interest.  But  if  they  are  thus  blind,  and  if  they 
place  an  obstacle  to  the  recognition  of  merit  and 
skill,  then  we  at  once  see  how  the  unions  can  make 
legitimate  use  of  their  organized  power  by  de- 
manding higher  wages  for  higher  productivity. 
Such  demands  are  sure  to  meet  with  success. 

This  method  of  raising  wages,  based  on  forces 
bringing  about  a  lessened  supply  and  an  increased 
demand,  shows  a  difference  as  wide  as  the  poles  from 
the  existing  artificial  method  of  "bucking"  against 
an  oversupply  by  an  ineffective  monopoly.  To  the 


LATTER-DAY  PROBLEMS 

laborer  who  wishes  higher  wages  the  advantage  of 
the  former  over  the  latter  is  so  evident  and  so  great 
that  further  illustration  or  emphasis  on  this  point 
would  be  out  of  place.  In  the  economic  history  of 
the  last  fifty  or  sixty  years  in  the  United  States  and 
Great  Britain  it  appears  that  money  wages  have 
risen  by  about  fifty  per  cent,  for  unskilled  labor 
to  over  one  hundred  per  cent,  for  higher  grades  of 
work,  while  the  hours  of  labor  per  day  have  been 
lowered  considerably.  Moreover,  this  gain  in 
money  wages  has  been  accompanied  by  a  fall  in  the 
prices  of  many  articles  consumed  by  the  laboring 
class.  This  fortunate  outcome  has  gone  on  simul- 
taneously with  a  progress  in  invention  and  in  the 
industrial  arts  never  before  equalled  in  the  history 
of  the  world,  and  it  is  a  progress  which  has  enabled 
the  same  labor  and  capital  to  turn  out  a  greater 
number  of  units  of  product.  In  fact,  the  enlarge- 
ment of  the  output  has  been  such  that  each  unit 
could  be  sold  at  a  lower  price  than  ever  before  and 
yet  the  value  of  the  total  product  of  the  industry 
has  sufficed  to  pay  the  old  return  upon  capital  and 
also  to  pay  absolutely  higher  money  wages  to  the 
workmen  for  a  less  number  of  hours  of  labor  in  the 
day.  Indeed,  one  is  inclined  to  believe  that  the 
gain  in  wages  by  the  working  classes  in  recent  years 

18 


THE  HOPE  FOR  LABOR  UNIONS 

has  been  due  far  more  to  this  increased  productivity 
of  industry  and  much  less  to  the  demands  of  labor 
unions  than  has  been  generally  supposed.  The 
productivity  method  of  raising  wages  has  the  ad- 
vantage over  the  one  in  present  use  in  that  it  gives 
a  quid  pro  quo,  and  excites  no  antagonism  on  the 
part  of  the  employer.  A  pressure  by  strikes  to 
have  productivity  recognized  must  be  successful, 
since  an  employer  cannot  afford  the  loss  conse- 
quent on  hiring  an  inefficient  workman.  The  in- 
sistence, as  at  present,  on  a  uniform  minimum  rate 
of  wages  by  process  of  terrorism,  and  without  re- 
gard to  the  supply  of  possible  competitors,  cannot 
for  a  moment  be  considered  in  comparison  with  the 
hopeful  and  successful  method  through  improved 
productivity.  The  one  is  outside,  the  other  within, 
the  control  of  any  individual  initiative. 

Keeping  these  things  in  mind,  those  of  us  who 
would  like  to  see  a  definite  and  permanent  progress 
of  the  laboring  classes  believe  that  here  the  unions 
have  a  great  opportunity.  They  must  drop  their 
dogged  attempts  to  enforce  a  policy  against  the 
oversupply  of  labor  by  a  futile  monopoly;  it  is  as 
useless  and  hopeless  as  to  try  to  sweep  back  the  sea 
with  a  broom.  On  the  other  hand,  should  the 
unions  demand  as  conditions  of  admission  definite 


LATTER-DAY  PROBLEMS 

tests  of  efficiency  and  character,  and  work  strenu- 
ously to  raise  the  level  of  their  productivity,  they 
would  become  limited  bodies,  composed  of  men  of 
high  skill  and  efficiency.  The  difficulty  of  supply 
would  be  conquered.  A  monopoly  would  be 
created,  but  it  would  be  a  natural  and  not  an  arti- 
ficial one.  The  distinction  between  union  and  non- 
union men  would,  then,  be  one  between  the  skilled 
and  the  unskilled.  The  contest  between  union  and 
non-union  men  would  no  longer  be  settled  by  force. 
Thus  the  sympathy  of  employers  and  the  public 
would  be  transferred  from  the  non-union,  or  the 
unfit,  to  the  union,  or  the  fit  men.  If  space  were 
sufficient,  interesting  cases  could  be  cited  here  of 
unions  which  have  already  caught  sight  of  the  truth, 
and  greatly  improved  their  position  thereby.  This 
policy  unmistakably  opens  the  path  of  hope  and 
progress  for  the  future. 

In  contrast  with  the  mistaken  policy  of  the  pres- 
ent, we  may  set  down  the  different  ways  in  which 
productivity  would  act  upon  the  four  evils  enu- 
merated at  the  end  of  the  second  part  of  our  study: 

i.  The  wrong  to  the  non-union  man  would  dis- 
appear. The  rivalry  of  union  and  non-union  men 
would  no  longer  be  the  competition  of  equals,  be- 
cause the  non-union,  or  inferior,  men  would  be  out 

20 


THE  HOPE  FOR  LABOR  UNIONS 

of  the  competition  for  given  kinds  of  work.  There 
is  no  wrong  to  a  non-union  man  if  he  is  excluded 
from  work  for  inefficiency.  The  wrong  of  to-day 
is  that  the  union  often  shields  numbers  of  inca- 
pables. 

2.  Since  the  unionists  would  represent  skill,  and 
the  non-unionists  lack  of  skill,  there  would  be  no 
need  of  force  to  hold  the  position  of  natural  mo- 
nopoly.   The  perpetual  defiance  of  the  law  in  order 
to  terrorize  non-union  men  would  have  no  reason 
for  its  existence;  and  the  worst  phase  of  unionism 
would  disappear.    Such  a  consummation  alone 
would  be  worth  infinite  pains;   but  if  it  should 
come  in  connection  with  a  policy  which  is  morally 
certain  to  improve  the  condition  of  the  workmen, 
not  to  reach  out  for  it  is  little  short  of  crime. 

3.  As  another  consequence  of  the  new  principle 
the  unionist  would  find  himself  and  his  comrades 
steadily  gaining  a  higher  standard  of  living  without 
resort  to  the  artificial  methods  of  politics.    Legis- 
lation would  not  be  needed  to  fight  against  the  re- 
sults of  the  oversupply  of  labor.    Like  ordinary 
business  men,  the  unionists  would  find  their  affairs 
peacefully  settled  in  the  arena  of  industry  by  per- 
manent forces,  and  not  in  the  uncertain  strife  of 
legislatures  and  political  conventions,  in  which  they 

21 


LATTER-DAY  PROBLEMS 

are  likely  to  be  outwitted  by  clever  party  leaders. 
And  yet  the  workmen  would  retain  in  their  organ- 
ized unions  the  power  to  command  justice  from 
those  employers  who  are  unjust. 

4.  The  new  policy  would  insure  community  of 
interest  between  employer  and  employee.  This 
objective  is  so  important,  it  has  been  so]  outra- 
geously ignored  in  countless  labor  struggles,  that  to 
attain  it  would  almost  be  like  the  millennium ;  and 
yet,  instead  of  being  moonshine,  it  is  simple  com- 
mon sense.  If  the  laborers  knew  and  acted  upon 
the  fact  that  skill  and  good-will  were  reasons  why 
employers  could  pay  better  wages,  the  whole  face 
of  the  present  situation  would  be  changed.  If  it 
were  objected  that  the  unfair  and  grasping  em- 
ployer would  pocket  the  surplus  due  to  the  im- 
proved efficiency  of  the  laborers,  it  must  be  re- 
membered that  the  unions  still  retain  their  power 
of  collective  bargaining.  But,  of  course,  the 
unions  must  not  believe  that  demands  can  be  made 
for  advances  of  an  unlimited  kind  far  beyond  the 
services  rendered  to  production  of  any  one  agent, 
such  as  labor. 

The  new  proposals  would  also  completely  re- 
move the  disastrous  tendency  to  make  work.  If 
men  obtain  payment  in  proportion  to  their  produc- 

22 


THE  HOPE  FOR  LABOR  UNIONS 

tivity,  the  greater  the  product  the  higher  would  be 
the  wages;  for  this  has  been  the  reading  of  eco- 
nomic history,  no  matter  how  individuals  here  and 
there  protest.  Hence  the  result  would  be  lower 
expenses  of  production,  a  fall  in  the  prices  of  staple 
goods,  and  a  generally  increased  welfare  among 
those  classes  whose  satisfactions  have  been  in- 
creased. 

Not  only  would  the  consumer  be  benefited,  but 
the  increased  productivity  of  industry  would  enable 
the  home  producer  to  sell  his  goods  cheaper  in 
foreign  markets.  As  things  are  going  now,  the 
hindrances  to  production  and  making  work  by 
unions  are  the  serious  influences  now  threatening 
to  contract  our  foreign  trade.  The  new  policy  pro- 
posed to  the  unions  would  therefore  aid  the  United 
States  in  keeping  its  present  advantages  in  the  field 
of  international  competition. 

While  it  has  been  impossible  to  discuss  fully  all 
the  points  which  may  have  arisen  in  the  reader's 
mind,  it  must  suffice  to  bring  into  bold  contrast  the 
present  erroneous  policy  of  the  labor  unions  with 
the  possible  one  of  productivity.  In  a  very  true 
sense,  the  labor  problem  is  a  conflict  between 
different  grades  of  skill.  Legitimate  industrial 
success  comes  with  the  ability  to  use  better  than 

23 


LATTER-DAY  PROBLEMS 

others  the  agencies  of  production.  One  reason 
why  managerial  power  commands  such  high  wages 
is  that  a  highly  capable  leader  in  industry  receives 
returns  not  merely  for  the  use  of  capital,  but  because 
he  sees  and  grasps  an  opportunity  where  other  men 
see  nothing.  No  matter  where  a  man  begins  in 
life,  if  he  has  skill,  insight,  foresight,  judgment, 
knowledge  of  men,  and  managerial  force,  he  will 
gain  at  least — if  not  more  than — in  proportion  to 
his  productivity.  Therefore,  if  the  unions  wish  to 
elevate  their  fellow-workers,  instead  of  breaking 
the  heads  of  non-union  men,  they  should  set  a  pre- 
mium on  industrial  education.  It  ought  to  be  as 
easy  for  a  working  man's  child  to  become  a  skilled 
craftsman — a  machinist,  carpenter,  mason,  or 
bricklayer — in  our  public-school  system  as  it  is  to 
acquire  geography  and  algebra.  By  eradicating 
industrial  incapacity  and  substituting  skill  therefor, 
we  should  be  increasing  the  wages  of  all  classes, 
developing  wealth  in  all  forms,  and  enlarging  the 
well-being  of  the  whole  nation. 


CHAPTER  II 
SOCIALISM  A  PHILOSOPHY  OF  FAILURE 


IT  is  impossible  not  to  sympathize  with  many  of 
the  purposes  of  socialism.  Looked  at  sym- 
pathetically, its  objective  propositions  are  the  re- 
sult of  a  state  of  mind  rather  than  of  a  logical 
system  of  thought;  and  one  cannot  be  indifferent 
to  this  state  of  mind.  To  be  sure,  it  is  a  matter  of 
temperament  rather  than  of  reason;  but  one  has 
an  honoring  sense  of  respect  for  those  who,  having 
listened  to  the  songs  of  the  sirens,  have  no  desire 
ever  to  return  to  the  land  of  humdrum.  By  this 
one  means  to  express  the  idea  that  socialists  are 
primarily  idealists,  and  that  they  have  arrived  at 
their  land  of  dreams  by  the  highway  of  idealism; 
and  that  it  is  precisely  because  they  are  idealists 
that  they  are  ever  wishing  to  escape  the  sordid  re- 
quirements of  a  world  largely  built  upon  bourgeois 
virtues.  Thus  it  results  that,  as  an  idealistic  ex- 
pression of  what  life  might  be,  it  appeals  strongly 

25 


LATTER-DAY  PROBLEMS 

to  the  latent  idealism  in  all  of  us — especially  to 
those  who  for  one  reason  or  another  find  ourselves 
little  endowed  with  material  wealth,  and  who  wish 
the  opportunity  for  leisure,  and  for  enjoyment  ac- 
cording to  our  tastes.  Whatever  our  level  of 
education  or  intelligence,  we  are  all  of  us  striving 
to  get  the  means  of  enjoying  that  which  seems  to 
each  of  us  the  most  attractive  way  of  spending  our 
time.  To  the  most  of  the  working  men  it  is  a  desire 
for  freedom  from  constant  grinding  manual  labor; 
and  to  mental  laborers,  it  is  a  desire  to  escape  from 
nervous  strain  and  anxiety,  and  to  have  leisure  for 
enjoyment. 

Thus,  while  socialism  appeals  to  an  almost  uni- 
versal longing  in  human  nature,  it  has,  on  the 
other  hand,  the  obvious  and  inevitable  inconsist- 
encies of  a  theory  detached  from  the  tyrannical 
rule  of  fact.  While  idealizing  the  possibilities  of 
human  nature  to  suit  an  a  priori  conception  of  life, 
until  this  poor  human  nature  is  fairly  unrecogniz- 
able, socialism  proposes,  as  one  means  to  its  end, 
to  obliterate  the  effects  of  existing  conditions  by 
the  removal  of  competition  in  the  struggle  for 
material  existence.  That  is,  it  suggests  material 
means  to  bring  about  ideal  conditions.  It  does 
not  primarily  put  its  emphasis  on  the  improvement 

26 


SOCIALISM   A  PHILOSOPHY  OF  FAILURE 

of  human  nature,  but  upon  a  change  in  the  dis- 
tribution of  material  wealth.  The  socialists  are 
seemingly  not  concerned  in  building  up  an  Altruria 
where  the  only  end  is  goodness  and  where  satisfac- 
tions are  only  spiritual.  It  is  what  seems  to  them 
the  unequal  distribution  of  material  possessions 
which  causes  them  to  criticise  existing  society. 
Throughout  socialistic  literature  there  is  the  well- 
known  insistence  upon  the  materialistic  interpre- 
tation of  history — a  conception  based  upon  a  hun- 
ger for  things  of  material  enjoyment,  and  for  more 
and  more  of  them.  Fundamentally,  they  have  as 
much  centred  their  aim  on  an  increase  in  material 
possessions  as  the  veriest  Napoleon  of  finance 
in  Wall  Street.  An  existence  in  which  the  ac- 
quisition of  more  material  wealth  is  of  very  large 
— if  not  of  chief — importance  is  in  the  thoughts 
of  both. 

The  ends  sought  for  by  the  socialists  are  not,  in 
effect,  different  from  those  of  the  mass  of  non- 
socialists  who  are  striving  to  acquire  wealth  in  order 
to  have  ease  and  leisure  for  enjoyment.  Agreeing 
in  their  aims,  their  differences — which  seem  to 
most  persons  to  place  them  as  wide  apart  as  the 
poles — really  consist  in  choosing  different  means  of 
accomplishing  their  ends.  The  ordinary  hustler 

27 


LATTER-DAY  PROBLEMS 

for  wealth,  without  or  within  the  stock  market, 
may  have  no  definite  moral  restraint  except  the 
fear  of  the  law  (in  fact,  he  may  even  contrive  to 
escape  the  law),  and  he  accepts  existing  institu- 
tions; but  he  plans  to  gain  his  end,  if  honest,  by 
productive  processes  and  trade;  or,  if  dishonest,  by 
a  thousand  ingenious  ways  of  transferring  to  him- 
self the  wealth  created  by  others.  On  the  other 
hand,  the  socialist  proposes  to  overturn  industrial 
competition  and  the  institution  of  private  property 
in  the  hope — vaguely  outlined  and  not  economi- 
cally analyzed — of  transferring  the  use  of  wealth 
from  those  who  have  to  those  who  have  not.  If 
he  does  not  now  have  wealth,  from  whom  is  he 
expecting  to  get  it,  when  socialism  has  come  to  its 
own  ?  Possibly  he  has  a  dreamy  belief  that  wealth 
can  be  created  and  maintained  in  existence  by  the 
public  will,  and  should  be  equally  distributed  like 
water  from  a  municipal  reservoir.  Clearly  enough, 
while  planning  for  a  more  even  distribution  of 
wealth,  the  essence  of  socialism  is  to  be  found  in  the 
means  which  it  proposes  for  accomplishing  an  end 
desired  by  most  of  us.  In  brief,  the  means  are  the 
abolition  of  competition  and  of  private  property. 
By  these  tools  the  fabric  of  idealism  is  to  be  builded 
in  the  future  land  of  dreams. 

28 


SOCIALISM  A  PHILOSOPHY  OF  FAILURE 

n 

Some  evidence  as  to  the  truth  of  the  observation 
that  socialism  is  the  outcome  of  a  state  of  mind, 
rather  than  of  a  logical  system  of  thought,  is,  to  my 
mind,  to  be  found  in  the  failure  of  the  socialists  to 
recognize  the  actual  conditions  under  which  we  are 
forced  to  live  on  this  globe.  It  is  characteristic  of 
devotees  of  any  system  based  more  or  less  on  feel- 
ing to  be  so  absorbed  in  a  priori  and  agreeable 
theorizing  as  to  be  utterly  oblivious  to  the  actual 
and  disagreeable  facts  of  our  daily  existence. 
Grant  that  we  all  wish  the  comforts  and  satisfac- 
tions which  material  wealth  gives,  we  are  obliged  to 
face  the  real  question,  no  matter  how  bald  and  dis- 
agreeable it  may  be:  How  can  we  get  possession 
of  this  wealth  ?  Leaving  fraud,  robbery,  and  force 
aside,  by  what  methods  can  men  produce  and  pos- 
sess material  wealth  in  a  free  country  like  ours, 
which  is  unburdened  by  a  feudal  system  and  in 
which  life  and  property  are  protected?  Is  it  not 
possible  that,  at  this  point,  the  socialists  have  omit- 
ted to  consider  some  matters  of  fact  which  can  be 
observed  by  any  one  ?  Indeed,  have  they  been  quite 
fair  with  themselves,  in  passing  by  considerations 
— which  we  may  here  proceed  to  point  out  ? 

29 


LATTER-DAY  PROBLEMS 

In  the  first  place,  we  can  get  our  material  satis- 
factions only  by  producing  them  in  the  ways  set  by 
the  conditions  of  life  on  this  globe.  These  are  of  a 
kind  not  to  be  lightly  brushed  aside.  We  are  not 
living  on  Mars.  On  this  planet,  the  earth  yields 
its  products  only  on  terms  which  require  ability  to 
overcome  and  use  the  forces  of  nature;  to  foresee 
and  discount  the  future,  and  to  collect  present 
goods  in  order  to  gain  a  larger  future  product  in 
operations  requiring  a  considerable  period  of  time ; 
to  use  human  effort  both  manual  and  mental ;  and 
to  devise  means  by  which  the  co-operation  of  all 
these  powers  may  be  united  for  the  most  efficient 
conduct  of  industry.  No  matter  whether  we  like  it 
or  not,  the  actual  wealth  in  existence  to-day — 
whether  distributed  unjustly  or  not — has  come  into 
being  only  by  the  operation  of  these  forces.  De- 
stroy, or  minimize,  any  one  of  them,  and  the  total 
sum  of  material  well-being  will  be  reduced.  As  to 
this  point  there  will  be  little  difference  of  opinion 
between  socialists  and  non-socialists. 

But  it  will  be  retorted  that,  although  wealth  is 
produced  only  by  the  above  painful  processes,  the 
acquisition  of  wealth — or  its  distribution  after  it  is 
produced — is  mainly  unjust;  that  it  is  the  illegiti- 
mate acquisition  of  the  world's  great  output  of 

30 


SOCIALISM  A  PHILOSOPHY  OF  FAILURE 

wealth  which  is  the  true  cause  of  the  belief  that 
the  existing  system  of  society  is  out  of  joint.  If, 
however,  we  admit  the  general  conditions  only 
under  which  wealth  can  be  produced,  we  must 
also  be  ready  to  assign  distributive  shares  to 
those  who  have  contributed  the  forces,  or  means, 
necessary  to  bringing  the  wealth  into  existence. 
We  may  grant  that  not  all  wealth  is  to-day  the 
property  of  those  who  have  gone  through  the  ef- 
forts and  sacrifices  of  production;  but  it  still 
remains  true  that  wealth — no  matter  who  owns 
it — is  turned  out  only  by  the  exercise  of  what 
are  sometimes  slightingly  dubbed  the  bourgeois 
virtues.  It  still  remains  true  that  the  existing 
income  of  society  depends  upon  the  exercise  of 
the  qualities  of  effort,  sacrifice,  patience,  persist- 
ence, courage,  honesty,  integrity,  truthfulness,  skill, 
thrift,  application,  foresight,  judgment,  common- 
sense,  business  honor,  long  experience,  observation 
of  men's  wants,  precise  information,  knowledge  of 
human  nature,  capacity  for  managing  men,  execu- 
tive ability,  and  organizing  power.  Any  man  who 
has  had  business  experience  knows  this  to  be  true. 
Yet,  the  socialist  may  grant  all  this;  he  may  admit 
that  wealth  can  be  produced  only  under  the  severe 
conditions  just  described;  but  he  may  rest  his 


LATTER-DAY  PROBLEMS 

whole  case  on  the  claim  that  this  wealth  is  unjustly 
distributed.  No  doubt,  the  state  of  mind  which  in 
these  days  is  called  socialistic  arises  from  a  belief 
that  the  present  competitive  system  of  industry  in- 
evitably causes  inequality  of  possessions  and  in- 
justice in  the  distribution  of  what  is  produced. 
Hence  the  central  point  in  the  socialist  philosophy 
is  a  demand  for  the  abolition  of  competition  and  a 
recourse  to  State  control. 

m 

In  all  fairness,  we  must  recognize  that  things 
economic  are  not  perfect;  that  human  beings  do 
not  always  do  what  is  right  and  just;  and  that  we 
must  accomplish  our  industrial  work  on  this  globe 
with  faulty  men.  Looking  at  the  matter  thus,  we 
find  much  to  sympathize  with  in  the  fundamental 
causes  which  stir  the  socialists  to  action.  They 
find  things  wrong,  and  they  have  set  to  work  with 
burning  zeal  to  make  them  right.  In  this  desire  of 
theirs  to  improve  the  world  every  one  must  sym- 
pathize. Without  radicals  to  break  up  wrongs  to 
which  we  have  grown  accustomed  we  shall  have 
little  progress.  Conservatism  is  too  often  the  ref- 
uge of  unjust  privilege.  The  only  question,  there- 
fore, in  regard  to  socialism  is:  Is  it  a  means  appro- 

32 


SOCIALISM  A  PHILOSOPHY  OF  FAILURE 

priate  to  the  end  ?  Let  us  face  the  matter  calmly 
as  practical  men.  Many  schemes,  from  the  times 
of  the  crusades  to  the  present  day,  have  been  de- 
vised for  making  the  world  better.  We  have  had 
many  Utopias  pressed  upon  us.  In  the  one  par- 
ticular scheme  known  as  socialism,  the  remedy  pro- 
posed is  the  abolition  of  competition  and  private 
property.  Will  this  remedy  remove  the  ills  of 
which  society  is  sick? 

At  the  outset  we  must  face  the  fact  of  the  im- 
perfection of  human  nature.  With  or  without 
socialism  this  fact  remains;  it  cannot  be  dodged. 
Is  socialism,  like  Christianity,  a  proposed  means  of 
changing  the  ethics  of  the  human  race?  On  the 
contrary,  it  is  based  on  a  materialistic  conception 
of  life.  It  proposes  a  change  in  externals,  in  the 
forms  of  society,  as  a  means  of  eliminating  evils 
which  have  their  roots  in  faulty  human  nature.  It 
is,  so  to  speak,  an  insistence  on  only  partial — not 
complete — changes  in  environment  as  the  sole 
power  to  cause  a  recrystallization  of  human  mind 
in  a  new  ethical  form.  Socialism  obviously  pro- 
poses no  practical  process  for  changing  the  ele- 
ments of  human  nature;  invariably  the  reforming 
spirit  of  socialism  is  taken  up  with  the  detailed 
schemes  which  for  the  time  seem  to  need  a  cure, 

33 


LATTER-DAY  PROBLEMS 

One  does  not  need  to  be  a  socialist  to  help  reform 
any  particular  existing  abuse.  Consequently,  un- 
less socialism  can  modify  the  essential  elements  of 
imperfect  human  nature — and  modify  it  not  in  a 
few  instances,  but  in  the  whole  mass  of  men — it 
cannot  in  itself  expect  to  relieve  the  world  of  any 
injustice  in  the  distribution  of  property  due  either 
to  the  inequality  or  iniquity  of  men.  Unless 
socialism  can  convince  us  that  merely  by  the  aboli- 
tion of  competition  and  private  property  there 
would  be  created  a  new  and  fundamental  virtue  in 
human  nature,  there  would  be  no  reason  to  look 
upon  it  as  anything  more  than  another  of  the  well- 
meant  but  useless  panaceas  proposed  by  emotional 
reformers. 

Since  imperfect  human  nature,  the  bad  mixed 
with  the  good,  is  absolutely  certain  to  remain  much 
the  same  under  socialism  as  under  existing  society, 
what  can  the  socialist  expect  to  gain  by  the  removal 
of  competition?  Will  inequalities  in  ability  and 
power  be  unknown  ?  Of  course  not.  Then,  will 
inequalities  of  reward  be  unknown?  Of  course 
not.  Under  any  legitimate  system  of  production 
men  will  show  unequal  industrial  powers.  Some 
are  energetic,  others  lazy;  some  are  quick,  others 
are  dull;  some  are  thrifty,  others  are  wasteful; 

34 


SOCIALISM  A  PHILOSOPHY  OF  FAILURE 

some  are  born  organizers,  others  are  born  to  follow; 
only  a  few  are  leaders  of  men,  while  the  masses  are 
inevitably  managed  by  the  few.  Consequently, 
under  any  form  of  society,  we  are  certain  to  have 
as  many  different  results  from  industrial  effort  as 
there  are  kinds  of  men.  Inequalities  of  wealth  are 
logical,  not  abnormal.  While  some  men — no 
doubt  high-minded,  artistic,  or  creative — are  fail- 
ures in  accumulating  wealth,  others — possibly  of 
less  value  for  the  improvement  of  society — are  suc- 
cessful in  gaining  large  fortunes.  It  depends  on 
the  aim  in  life.  If  wealth  is  the  only  test  of  success, 
then  the  world  is  indeed  out  of  joint. 

As  a  cure  for  the  ills  of  this  world,  however, 
socialism  proposes  a  scheme — whether  practical  or 
not  is  not  here  the  question — based  on  a  change  in 
the  possession  of  material  wealth.  That  is,  will 
the  spending  of  more  money  directly  lead  to  the 
improvement  of  character?  All  history,  and  the 
present  conduct  of  our  richer  classes,  seem  to  show 
that  greater  self-indulgence  followed  by  a  weaken- 
ing of  fibre,  with  a  lowered  moral  purpose,  are  the 
inevitable  results  of  unrestrained  expenditure. 
This  holds  true,  in  spite  of  the  theory  that,  by 
equalizing  the  expenditure  of  all  classes,  the  poor 
would  be  elevated  in  the  moral  scale  by  having 

35 


LATTER-DAY  PROBLEMS 

more  to  expend,  and  that  the  wrong-doing  of  the 
rich  would  be  reduced  by  taking  away  the  power 
of  self-indulgence.  It  cannot  be  overlooked  that 
human  nature  is  much  the  same  in  all  classes.  In- 
creased expenditure  in  itself  will  not  provide  the 
character  to  govern  the  spending;  so  that  self- 
indulgence  will  be  only  transferred.  Clearly,  an 
increase  of  material  rewards — while  a  gain  to  those 
already  having  a  moral  sense — would  give  only 
wider  play  to  the  existing  defects  of  human  nature. 
If  spending  is  made  possible  to  those  who  have  not 
earned  it,  deterioration  is  inevitable.  What  we 
should  hope  to  see  instituted  is  a  proper  means  of 
increasing  the  productive  efficiency  of  those  who 
have  little,  so  that  their  opportunity  for  enlighten- 
ment may  be  larger  without  the  destruction  of 
fibre. 

The  radical  weakness  of  socialism  is  in  its  at- 
tempt to  coin  idealism  out  of  materialism.  In  the 
proposed  abolition  of  competition  and  private 
property,  socialism  would  take  away  most  of  the 
present  incentives  to  energy  and  productivity. 
More  than  that,  it  stakes  everything  on  the  assump- 
tion that  a  partial  change  in  external  environment 
— such  as  would  be  produced  only  by  the  disappear- 
ance of  competition  and  private  property — would 

36 


SOCIALISM  A  PHILOSOPHY  OF  FAILURE 

overcome  all  the  faults  of  human  nature  which  now 
disturb  our  social  content.  To  take  a  child  away 
from  its  surroundings  in  infancy,  although  it  may 
not  remove  its  hereditary  nature,  may  establish 
new  habits  which  will  influence  its  conduct;  but 
socialism  does  not  provide  for  any  such  extended 
removals.  People  are  to  be  left  in  the  same  general 
environment,  while,  of  all  the  varied  conditions  of 
life,  only  competition  and  private  property  are  to  be 
removed.  Is  there  any  such  virtue  in  the  abolition 
of  these  two  as  will  reform  all  human  nature  ?  That 
it  will  we  have  no  evidence  but  the  glorious  hopes 
of  the  enthusiasts. 

Since  the  socialist  grieves  at  the  unequal  dis- 
tribution of  material  wealth,  and  regards  a  better 
distribution  as  essential  to  the  reformation  of 
society,  one  is  obliged  to  ask  at  once  why  the  so- 
cialist does  not  himself  set  to  work  and  accumulate 
wealth  as  well  as  others  ?  In  our  country  there  are 
hundreds  of  thousands,  if  not  millions,  of  cases 
where  men  have  begun  with  nothing  and  accumu- 
lated a  competence.  Why  do  not  the  socialists  do 
the  same  ?  If  material  wealth  is  the  cure-all,  why 
not  go  in  at  once  and  get  it  ?  The  answer  is  not 
far  to  seek.  They  claim  that  they  have  no  chance 
of  success  in  the  competitive  struggle  with  others. 

37 


LATTER-DAY  PROBLEMS 

They  wish  wealth,  but  they  do  not  possess  the 
bourgeois  virtues  necessary  for  its  acquisition  under 
existing  conditions.  Therefore,  they  wish  to  re- 
arrange society  so  that  those  who  do  not  now  have 
the  industrial  qualities  may  obtain  wealth  as  well  as 
those  who  do  have  them.  Of  course,  they  do  not 
explain  who  is  to  produce  the  wealth  they  are  to 
share,  and  which  they  are  incompetent  to  produce. 
That  is  supposedly  an  insignificant  detail.  How- 
ever this  may  be,  the  central  point  in  the  question 
is  this:  having  admitted  their  failure  to  achieve 
success  in  accumulating  material  wealth  in  a  com- 
petitive struggle  open  freely  to  all,  they  propose  the 
abolition  of  free  competition.  State  control  is  to 
take  its  place.  Here  we  have  socialism  confess- 
edly as  a  philosophy  of  failure.  Just  to  the  extent 
that  the  socialists  insist  on  their  inability  to  accu- 
mulate as  much  wealth  as  others,  under  existing 
conditions,  they  are  unconsciously  advertising 
their  own  industrial  inefficiency.  They  clamor 
for  a  philosophy  of  failure — for  a  system  in  which 
they  shall  be  relieved  from  the  inevitable  results  of 
their  relative  inferiority  in  obtaining  the  material 
means  which  they  regard  as  essential  to  their  ideal- 
istic ends.  Those  resort  to  it  who  are  unequal  to 
the  competitive  struggle  and  to  the  survival  of  the 

38 


SOCIALISM  A  PHILOSOPHY  OF  FAILURE 

fittest  in  gaining  material  wealth.  For  instance, 
if  Harvard  were  always  victorious  over  Yale  in 
foot-ball,  and,  if,  then,  Yale  should  propose  an 
existence  in  which  there  should  be  no  foot-ball, 
Yale  would  be  generally  regarded  as  having  failed, 
in  that  particular  sport,  in  holding  her  own  on 
equal  terms.  She  would  be  regarded  as  having 
fallen  back  on  a  philosophy  of  failure.  But  it 
would  still  not  prevent  Yale  men  from  gaining  suc- 
cess in  other  things  than  foot-ball.  Likewise,  it 
should  be  observed  that  gaining  other  things  than 
wealth,  such  as  character  and  lofty  conduct,  has 
little  or  no  emphasis  in  the  philosophy  of  socialism. 
In  short,  the  appeal  to  socialism  is  an  appeal 
against  the  inequality  and  imperfection  inherent  in 
human  beings;  and  the  ineradicable  weakness  of 
socialism  is  that  it  charges  upon  the  external  forms 
of  society  what  should  be  charged  upon  poor  human 
nature.  Only  too  often,  socialists  seem  to  be  in- 
capable of  seeing  this  gap  in  their  logic. 

In  spite  of  all  this  elementary  truth,  every  one  is 
aware  that  a  stimulus  to  the  socialist  propaganda 
is  found  in  the  constant  iteration  upon  special 
privileges  obtained  under  present  conditions. 
Vehement  assault  is  made  upon  the  grant  of  legis- 
lative favors  and  monopolies  by  which  some  per- 

39 


LATTER-DAY  PROBLEMS 

sons  are  believed  to  have  accumulated  great  wealth 
at  the  public  expense.  Therefore,  say  the  socialists, 
abolish  competition  and  private  property.  Any 
system  is  wrong,  they  say,  which  permits  any  one 
man  to  accumulate  a  colossal  fortune.  Yet  here 
is  an  obvious  non  sequitur.  Grant  that  these 
wrongs  are  as  they  are  represented ;  yet  it  does  not 
follow  that  we  need  to  change  the  forms  of  society 
to  rid  ourselves  of  the  evils.  On  calm  examination, 
this  criticism  of  society,  as  it  now  goes  on,  seems  to 
be  directed  not  against  the  intention  and  purpose 
of  modern  society,  but  against  the  failure  to  carry 
out  the  intention  and  purpose  of  society  as  now 
expressed  in  existing  institutions.  If  it  is  the  gen- 
eral intention  not  to  allow  injustice,  there  is  noth- 
ing, as  things  are  now,  to  prevent  the  public  from 
carrying  out  its  intention.  The  remedy  for  these 
wrongs,  granting  their  existence,  is  to  be  found, 
therefore,  not  in  the  destruction  and  reconstruction 
of  society,  but  in  the  active  co-operation  of  all  well- 
meaning  men  in  enforcing  the  admitted  purposes 
and  capabilities  of  the  existing  forms  of  society. 
That  is,  equality  of  treatment  before  the  law  and 
equal  justice  in  the  courts  are  entirely  the  outcome 
of  public  opinion.  If  public  opinion  does  not  de- 
mand them,  socialism  may  pass  resolves  until  the 

40 


SOCIALISM  A  PHILOSOPHY  OF  FAILURE 

crack  of  doom  without  accomplishing  anything. 
The  only  real  remedy  for  such  ills  is  always  in  the 
hands  of  society  as  it  now  exists.  If  they  are 
allowed  to  go  on,  it  is  because  men  are  indifferent; 
not  because  the  forms  of  society  through  which  they 
act  are  necessarily  inadequate. 

Moreover,  the  touch-and-go  way  of  proposing 
to  topple  over  the  long-established  institutions  of 
society  because  some  things  are  not  done  as  we  like 
is  another  evidence  of  the  emotional  and  unpene- 
trating  methods  of  some  modern  reformers.  These 
institutions  are  the  growth  and  outcome  of  the  very 
inner  nature  of  mankind;  and  this  has  been  con- 
firmed by  the  instincts  which  have  been  created  by 
the  long-continued  existence  of  these  institutions. 
For  ages  men  have  been  working  out  representa- 
tive and  local  self-government  solely  by  dint  of  the 
experience  of  the  race,  and  not  by  the  light  of  any 
a  priori  theory  of  the  dreamers.  This  is  the  teach- 
ing of  the  whole  history  of  free  and  constitutional 
government.  We  have  come  where  we  are  to-day 
solely  because,  in  free  countries  like  ours,  we  have 
succeeded  in  repressing  inequality  due  to  injustice, 
tyranny  and  force.  In  truth,  great  accumulations 
of  capital  were  never  possible  until  equality  and 
justice  of  treatment  were  secured  to  all.  The 


LATTER-DAY  PROBLEMS 

socialist  side-steps  the  essential  lesson  drawn  from 
the  political  development  of  the  race — chiefly  be- 
cause he  finds  that  men  are  not  yet  perfect.  It  is 
no  argument  against  the  existing  forms  of  society 
that  absolutely  perfect  justice  and  equality  are  not 
always  obtained.  Present  institutions  reflect  fairly 
well  the  qualities  of  erring  human  nature.  Only 
as  a  race  grows  in  ethical  standards  will  its  institu- 
tions respond.  The  cause  of  change  must  be  in 
the  qualities  of  man  and  not  in  the  institutions 
which  grow  out  of  those  qualities.  Frail  human 
nature  cannot  be  made  perfect  by  the  limited  pro- 
gramme of  socialism,  any  more  than  a  frog  can  be 
made  to  grow  fur  by  legislation.  The  detachment 
of  socialism  from  the  facts  of  life  is  here  again  ap- 
parent. Present  society  is  what  it  is,  historically  and 
evolutionally,  solely  because  it  is  conditioned  by  the 
very  human  nature  given  to  us  to  work  with  on  this 
planet.  It  is  absurd  to  reason  as  if  we  were  perfect 
angels  in  a  perfect  paradise.  Socialism  is  a  dream  of 
perfection  suited  only  for  a  perfected  human  nature. 

IV 

Yet  the  more  practical  of  the  socialists  may  with 
propriety  reply  that  the  conditions  of  living  on  this 
planet  do  not  oblige  society  to  give  special  oppor- 

42 


SOCIALISM  A  PHILOSOPHY  OF  FAILURE 

tunities  to  some  and  deny  them  to  others;  that 
society  can  do  as  it  pleases  with  the  free  gifts  of 
nature;  and  that  private  property  is  not  necessary 
to  securing  the  highest  efficiency  and  happiness  of 
man.  There  is  force  in  this  criticism.  There  is 
no  divine  right  in  private  property;  it  is  a  creature 
of  the  social  will.  It  has  come  into  existence  by 
the  consent  of  society,  and  is  what  it  is  as  the  out- 
come of  the  experience  of  the  race.  It  is  not  an 
accident;  it  is  an  expression  of  the  wishes  of  the 
race  as  they  have  been  developed  by  time  and  evo- 
lution. It  is  with  us  because  men  believe,  for 
good  or  for  ill,  that  the  institution  has  best  served 
their  purposes  through  many  centuries.  It  re- 
mains, and  will  remain,  solely  because  men  believe 
that  they  get  more  good  than  evil  out  of  it.  It  is 
not  pretended  that  imperfect  human  beings  will 
make  out  of  private  property  in  land  an  institution 
so  perfect  in  every  respect  that  no  one  in  all  condi- 
tions will  meet  with  inconvenience  or  unequal 
opportunity.  Even  though  there  are  things  which 
weigh  against  it,  enormous  gains  have  come  from 
private  property,  which  send  the  scales  down  in  its 
favor.  It  has  given  a  stimulus  to  effort,  thrift,  and 
improvement  of  the  soil  by  the  owner  which  could 
never  have  been  known  under  a  temporary  tenure. 

43 


LATTER-DAY  PROBLEMS 

All  scientific  rotation  of  crops,  all  planting  of 
orchards,  all  drainage  of  land,  all  permanent 
buildings  and  fixtures,  all  improvements  which  be- 
came incorporated  with  the  soil,  all  lasting  private 
docks,  all  costly  business  structures  in  the  midst 
of  great  cities,  all  railway  investments  of  private 
capital — all  these  would  be  made  impossible  with- 
out the  expectation  of  permanent  possession  im- 
plied in  the  private  ownership  of  land.  And  the 
recent  transfer  of  ownership  to  former  Irish  ten- 
ants, which  has  admittedly  brought  out  new  thrift 
and  industry,  is  a  practical  testimony  to  the  magic 
of  private  property  in  land.  Lasting  improve- 
ments on  ground-rents  are  made  possible  only  by 
a  tenure  so  long  as  practically  to  give  possession 
during  the  life  of  the  improvement  and  for  sev- 
eral generations  of  improvers.  To  the  intelligence 
of  society  as  a  whole  these  are  preponderating 
advantages. 

This  justification  of  the  action  of  the  race,  as 
shown  in  the  institution  of  private  property  in  land, 
does  not  imply  that  no  disadvantages  exist  when 
the  matter  is  carried  to  an  extreme.  Under  the 
general  protection  to  private  property  a  man  may 
so  accumulate  and  control  land  as  to  work  a  dis- 
advantage to  society;  he  may  keep  vast  tracts  out 

44 


SOCIALISM  A  PHILOSOPHY  OF  FAILURE 

of  cultivation,  to  the  damage  of  others.  Hence, 
just  as  soon  as  the  act  of  any  one  person  infringes 
on  the  rights  of  others,  society  would  have  a  right 
to  interfere.  In  South  America,  especially  on  the 
west  coast,  the  Indians  of  a  low  order  of  civiliza- 
tion have  possession  of  a  large  part  of  the  land. 
The  suggestion  there  comes  from  those  who  are 
well-to-do  and  intelligent  to  dispossess  the  ignorant 
native  of  the  soil  in  the  interest  of  progress  and 
greater  productivity.  With  us  the  suggestion  of 
limiting  private  property  comes  from  the  proleta- 
riat. Whoever  may  be  the  offender,  it  lies  in  the 
power  of  society  to  preserve  the  general  mass  of 
gains  from  the  institution,  and  yet  to  establish 
rules  by  which  the  disadvantages  may  be  mini- 
mized. If  so,  it  would  be  unnecessary  to  resort  to 
the  remedy  proposed  by  socialism  and  destroy  all 
the  vast  gains  to  the  race  of  private  property  in 
order  to  remove  only  lesser  disadvantages. 

Private  property,  of  course,  is  not  ideally  per- 
fect ;  it  contains  a  composite  of  various  possibilities. 
Under  it,  great  and  unexpected  wealth  may  come 
to  a  man  without  any  foresight  or  skill.  A  pioneer 
squatter  in  his  log-house,  living  on  scanty  crops 
from  a  poor  soil,  may  awake  some  morning  to  find 
he  is  living  over  a  rich  deposit  of  oil,  or  copper,  or 

45 


LATTER-DAY  PROBLEMS 

zinc.  Possibly  such  discoveries  may  be  regarded  as 
partly  belonging  to  the  State,  if  the  State  is  poor; 
but,  as  a  rule,  under  private  property,  they  belong 
to  the  owner  of  the  land.  It  may  thus  throw  oppor- 
tunity and  wealth  into  the  lap  of  the  lucky  without 
the  exercise  of  any  toil  or  thrift.  Many  large  for- 
tunes have  originated  in  this  way.  Nevertheless, 
such  fortunes  arise  from  an  addition  to  the  wealth 
of  the  world,  and  are  not  due  to  a  subtraction  from 
that  produced  by  any  one  else.  No  one  else  is  hurt. 
Unless  such  gains  as  these  are  permitted,  however, 
it  would  be  difficult  to  retain  other  and  similar 
gains  always  expected  by  persons  of  small  means. 
That  is,  millions  of  our  people  have  bought  farm 
lands  with  the  expectation  that  the  increase  of 
population  in  their  neighborhood  would  raise  the 
value  of  their  holdings.  An  unearned  increment 
goes  to  the  farmer;  and  no  one  seems  to  think  evil 
of  it,  when  it  is  small  in  amount.  But  the  principle 
of  equal  treatment  is  involved  whether  the  amount 
be  large  or  small.  Thus,  there  is  here,  in  these 
cases,  no  reason  at  all  for  destroying  all  the  enor- 
mous gains  from  private  property  because  of  some 
possible  inconsistencies  which  are  incidental  to  the 
general  institution.  To  destroy  the  important 
gains  in  order  to  avoid  some  lesser  evils,  as  would 

46 


SOCIALISM  A  PHILOSOPHY  OF  FAILURE 

follow  from  the  socialistic  dogma,  would  be  another 
evidence  of  detachment  from  the  world  of  fact  in 
which  we  live.  It  is  like  the  traveller  who  throws 
away  his  shoes  because  they  pinch  his  toes,  and 
who  finds  himself  as  a  consequence  obliged  to 
tread  a  flinty  road  in  his  bare  feet.  He  is  very  cer- 
tain to  return  to  shoes  sooner  or  later. 

v 

Since  the  socialist  believes — provided  he  is  not 
himself  the  owner  of  property — that  the  major  part 
of  the  crimes  against  society  arise  from  contests  for 
property,  he  may  hope  to  regenerate  social  life  by 
the  annihilation  of  this  source  of  crime.  But  un- 
less human  nature  is  transformed  men  will  still  be 
selfish  and  unprincipled  whether  private  property 
exists  or  not.  If  a  river  is  fed  by  a  mountain 
stream,  the  river  does  not  cease  to  exist  merely  be- 
cause its  course  is  diverted  by  blocking  up  its  old 
river-bed.  This  discussion  of  the  abolition  of 
private  property  is  as  old  as  the  Romans.  It  is 
now  largely  academic. 

Nor  is  it  of  much  avail  to  analyze  the  economics 
of  socialism  which  have  been  filtered  down  from 
Marx  through  many  absorbing  and  modifying 
minds.  There  is  no  uniform  economic  programme 

47 


LATTER-DAY  PROBLEMS 

among  the  wide-spread  sections  of  the  socialist 
propagandists.  As  has  been  said,  socialism  is  not 
a  logical  system  of  thought.  A  feeling  of  injustice 
having  arisen,  doctrines  have  been  created  from 
time  to  time,  to  suit  the  need.  Socialism  is  not  to 
be  overcome  by  argument  and  economic  analysis; 
it  can  be  removed  only  by  removing  the  causes  of 
the  feeling — however  that  may  have  arisen.  So- 
cialists hot  from  the  ovens  of  European  absolutism 
still  sizzle  after  being  placed  in  the  cool  air  of  free 
America.  Unable  to  reason  calmly,  their  emotions 
throw  them  passionately  against  any  form  of  con- 
trol, even  that  which  free  representative  govern- 
ment has  established  in  the  general  interest.  Yet 
they  place  before  them  the  shield  of  some  sort  of 
Marxian  theory,  behind  which  they  fight. 

Since  inequality  of  wealth  is  believed  to  be  due 
to  a  wrong  social  system,  it  was  natural  for  the 
proletariat  to  devise  a  theory  by  which  the  value  of 
the  product  was  claimed  to  have  been  created  solely 
by  labor — meaning  usually  manual  labor.  By 
eliminating  capital  as  a  necessary  agent  of  produc- 
tion, of  course  interest  was  regarded  as  a  "steal." 
Thus  the  rhetoric  of  socialism  has  produced  a 
flamboyant  literature  in  which  the  industrial 
struggle  is  always  believed  to  be  between  labor  and 

48 


SOCIALISM  A  PHILOSOPHY  OF  FAILURE 

capital.  And,  consequently,  capitalism  is  re- 
garded as  a  system,  and  almost  blackened  with 
sulphurous  invective.  Whatever  is  meant  by 
"capitalism" — and  it  is  charged  with  countless 
sins — capital  itself  is  as  necessary  to  production  as 
is  labor,  both  manual  and  mental.  This  is  a  fact, 
to  be  observed  by  any  one  who  has  eyes.  If  labor 
is  in  itself  all-sufficient,  then  why  do  not  the  laborers 
themselves  go  on  erecting  shoe-factories  and 
cotton-mills  and  put  the  product  on  the  market? 
There  is  absolutely  nothing  to  prevent  but  the  lack 
of  skilled  management,  which,  after  all,  is  only  a 
high  grade  of  mental  labor.  It  is  silly  to  talk  about 
capital  not  being  needed  in  production.  Capital 
and  labor  are  both  as  necessary  to  each  other,  if 
production  is  intended,  as  the  two  blades  of  the 
scissors  are  necessary  for  cutting.  It  is  a  place  for 
the  old  Roman  story  of  the  stomach  and  the  other 
members  of  the  body. 

When  socialists  saw  that  the  product  provided 
more  than  wages  for  manual  labor,  they  accounted 
for  it  by  calling  it  "surplus  value."  This  was  only 
their  vague  way,  in  default  of  economic  analysis, 
of  explaining  the  existence  of  a  sum  which,  in  any 
modern  industry,  must  go  to  certain  other  factors 
in  industry  which  cannot  by  any  possibility  be 

49 


LATTER-DAY  PROBLEMS 

overlooked  if  production  is  to  continue.  The 
socialist  urges  that  wealth  is  unjustly  distributed 
because  the  whole — or  the  major  part — does  not 
go  to  manual  labor.  If  capital  demands  a  share 
as  essential  to  production,  it  sometimes  excites 
cerebral  irritation  in  the  socialist.  Now,  if  the 
laborer  only  knew  it,  he  would  find  that  the  battle 
is  going  his  way.  The  distribution  is  not  going 
in  favor  of  capital,  but  in  favor  of  labor.  Human 
effort  is  winning  the  day.  Capital  itself  is  neces- 
sary to  production,  whenever  any  division  of 
labor  exists;  but  the  percentage  received  by  cap- 
ital, qua  capital,  is  not  an  increasing  share,  or 
percentage.  Ask  any  widow,  who  has  been  left 
capital  by  her  husband,  if  she  can  invest  her  funds 
at  an  increasing  rate.  Then,  what  is  all  this  ex- 
citement about  ?  Why  is  capital  so  much  abused  ? 
Simply  because  there  are  other  factors  in  produc- 
tion which  must  receive  shares,  and  the  emotional 
theorists  have  not  had  enough  horse-sense  to  see 
it;  and  they  think  that  capital  gets  it  all.  The 
truth  is,  that  the  largest  shares  in  industry  do 
not  go  to  capital,  but  to  labor — not  unskilled 
manual  labor,  but  to  skilled  labor,  and  to  highly 
efficient  mental  labor  in  the  management  and 
organization  of  industry.  If  the  socialist  but 

So 


SOCIALISM  A  PHILOSOPHY  OF  FAILURE 

knew  it,  he  would  find  this  outcome  to  be  the  one 
cheerful  and  inspiring  thing  in  the  world  of  to-day. 
That  is,  the  contest  for  the  distribution  of  the 
wealth  produced  is  one  of  laborers  against  labor- 
ers; and  the  cheerful  thing  about  it,  and  that 
which  opens  up  a  vista  of  promise  to  any  man  of 
ambition  and  ability,  is  that  industrial  capacity 
will  carry  a  man  to  the  front  and  win  the  enor- 
mous wages  which  go  to  organizing  power,  just 
as  surely  as  wind  and  muscle  will  win  a  Mara- 
thon race.  The  competitive  struggle,  which  so 
agitates  the  socialist,  is  really  a  contest  of  inferior 
against  superior  labor  power,  of  inferior  against 
superior  human  effort  whether  physical  or  mental. 
Not  understanding  this,  he  wishes  to  escape  the 
penalty  of  inferiority — not  by  improving  the  in- 
ferior until  it  equals  the  superior — but  by  resort 
to  the  philosophy  of  failure,  and  the  abolition  of 
the  struggle!  The  folly  of  it  is  almost  pathetic. 
It  is  more  agreeable  to  be  told  that  the  cause  of 
low  wages  is  in  something  outside  of  him,  instead 
of  being  instructed  that  the  cause  is  within  him- 
self, in  his  native  power  or  in  his  education  and 
training.  This  is  the  homely  truth  which  should 
be  enforced,  without  regard  to  the  popularity  of 
him  who  says  it. 


LATTER-DAY  PROBLEMS 

If  pushed  too  hard,  the  agitator  will  still  recur 
to  the  old  point  that  large  accumulations  are 
obtained  only  at  the  expense  of  the  share  of  others. 
As  has  been  said  before,  there  is  both  right  and 
wrong  in  the  world;  so  there  are  fortunes  both 
rightly  and  wrongly  won.  Some  fortunes,  more- 
over, have  been  gained  in  providing  for  men  the 
means  of  intemperance  and  speculation.  Grant 
this.  Yet,  as  things  now  are,  society  can,  if  it 
wishes,  provide  the  necessary  means  of  preventing 
these  wrongs.  Because  reformers  shrink  at  this 
task — the  only  practical  remedy  available — there 
is  no  reason  for  overthrowing  all  the  institutions 
which  have  been  evolved  by  the  race  in  centuries 
of  growth.  The  sound  and  healthy  elements  in 
society,  the  elemental  sources  of  character  and 
legitimate  industry,  should  not  be  destroyed  in 
the  effort  to  strike  out  minor  evils.  That  would 
be  a  mistaken  maladjustment  of  emphasis.  To 
assume  that  all  wealth  is  won  at  the  expense  of 
others  is  to  assume  that  all  men  are  wholly  evil. 
No  mercy  should  be  shown  to  wrong-doing  in 
industry  any  more  than  in  politics  and  govern- 
ment. Just  as  there  are  statesmen  who  are  not 
corrupt  politicians,  so  there  are  honorable  men  of 
affairs  in  industry.  Indeed,  the  industrial  world 

52 


SOCIALISM  A  PHILOSOPHY  OF  FAILURE 

is  full  of  examples  of  wealth  honorably  won. 
Because  some  men  are  evil,  there  is  no  reason  for 
assuming  that  a  materialistic  philosophy  bent  on 
redistributing  wealth  will  make  all  business  men 
into  perfect  human  beings. 

VI 

The  philosophy  of  socialism  has  spread  in 
many  directions  under  a  kindly  desire  to  make 
things  right.  It  centres  about  the  abolition  of 
competition.  Thus,  in  a  way,  it  seems — per- 
haps wrongly — to  decry  the  necessity  of  encour- 
aging the  free  expression  of  individual  activity 
in  industry.  It  assumes  that  the  evil-doing  of 
society  can  be  removed  by  the  action  of  the  state. 
If  men  are  unrestrained,  a  vast  amount  of  "so- 
cial power,"  it  is  said,  is  allowed  to  go  to  waste. 
Thus  a  paternalistic  form  of  government  is 
looked  upon  sympathetically  even  by  those  who 
would  not  wish  to  be  regarded  as  socialists.  The 
restraint  upon  the  free  action  of  human  initia- 
tive is  supposedly  in  the  best  interest  of  a  country's 
growth  in  power  and  happiness. 

One  point  in  this  connection  is  clear:  it  is  de- 
sirable to  get  all  the  gains  of  individual  initiative 
and  creative  power,  and  yet  to  prevent  the  evils 

S3 


LATTER-DAY  PROBLEMS 

of  unrestrained  individualism.  Hence,  we  get  a 
very  simple  maxim  of  political  interference: 
Just  as  soon  as  the  acts  of  any  person  infringe 
upon  the  rights  of  others  the  State  should  interfere 
in  the  interest  of  equality  and  justice.  Beyond 
this  limit  individual  activity  should  be  left  un- 
trammelled and  encouraged  to  believe  that  it  will 
receive  all  the  rewards  due  to  its  own  initiative. 
It  is  unquestionable  that  the  continued  imposi- 
tion upon  others  of  power  and  direction  from  out- 
side inevitably  tends  to  reduce  the  creative  strength 
of  the  individual  and  to  bring  about  a  deteriora- 
tion in  the  stock.  The  only  way  by  which  the 
best  can  be  got  out  of  the  race  is  by  stimulating 
rather  than  by  repressing  every  possible  kind  of 
new  energy — and  by  offering  all  possible  rewards 
for  its  exercise.  It  is  hardly  conceivable  that  any 
one  set  of  government  officials  should  be  so  om- 
niscient as  to  know  just  how  to  stimulate  every 
other  human  being  by  processes  of  legislation. 

Finally,  it  would  be  only  fair  to  compare  so- 
cialism, which  is  an  ideal,  untested  by  experience, 
with  the  competitive  system,  not  as  it  is  now,  but 
as  it  would  work  out  with  a  perfected  human 
nature.  To  improve  the  world,  living  as  at  pres- 
ent under  a  competitive  system,  offers  an  induce- 

54 


SOCIALISM  A  PHILOSOPHY  OF  FAILURE 

ment,  as  great  as  does  socialism,  to  the  eager 
idealist  who  wishes  to  work  for  righteousness.  If 
perfection  and  noble  ideals  are  established  as  per- 
manent elements  of  the  competitive  system  we 
shall  have  as  great  results  as  in  the  dream  of  so- 
cialism. But  perfection  is  no  more  to  be  looked 
for  in  the  one  case  than  in  the  other. 

Thus  we  are  led  to  believe  that,  while  idealism 
is  an  essential  incentive  to  progress — and  Ameri- 
cans are  preeminently  idealists — its  path  to  defi- 
nite results  must  lie  in  some  direction  other  than 
socialism.  Nor  should  we  wish  to  be  understood 
to  mean  that  socialism  has  been  wholly  useless. 
It  has  forced  its  case  to  serious  discussion ;  and  the 
liberal  conceptions  behind  it  cannot,  and  ought 
not  to  be,  lightly  disposed  of.  But,  as  a  practical 
people,  who  must  deal  with  the  world  as  it  exists, 
we  must  inevitably  conclude  that  socialism  is  not 
a  means  appropriate  to  the  desired  end. 


55 


CHAPTER  III 
THE  ABOLITION  OF  POVERTY 


PERSONS  disposed  to  exaggerate  not  infre- 
quently tell  us  that  we  are  living  on  a  vol- 
cano; and  that  an  upheaval  more  destructive 
than  the  French  Revolution  is  close  upon  us, 
unless  we  set  to  and  change  the  present  condi- 
tions under  which  some  have  unlimited  expendi- 
ture for  their  slightest  desire,  while  masses  of 
others  struggle  for  a  miserable  existence  only 
with  pain  and  grinding  labor.  Certainly,  in  the 
whole  problem  of  improving  the  economic  status 
of  mankind,  the  one  phase  which  appeals  most  to 
us  all  is  the  one  which  concerns  the  lower  class  of 
unskilled  workers.  With  those  who  have  already 
won  something,  and  who  have  already  risen  a 
round  or  two  on  the  industrial  ladder,  we  are  not 
so  deeply  interested  as  with  those  at  the  bottom 
who  are  unskilled,  the  sport  of  every  change  of 
industrial  demand,  and  ignorant  of  means  of 

56 


THE  ABOLITION  OF  POVERTY 

betterment.  It  is  the  beggarly  sums  received  by 
those  in  uncertain  and  overcrowded  employments 
— and  too  often  the  unemployment  itself — which 
ought  to  stir  our  sympathies  and  set  us  to  thinking. 
What  have  we  to  offer  ?  If  economics  has  nothing 
to  present  as  an  offset  to  the  vague  and  often  in- 
jurious schemes  of  the  untrained  sentimentalists, 
then  it  should  retire  to  the  limbo  of  useless  and 
abandoned  studies.  In  brief,  what  has  it  to  say  as 
to  'the  elevation  of  a  race,  or  class,  in  the  scale  of 
living  ?  Has  it  any  practical  advice  to  offer  for  the 
abolition  of  extreme  poverty  ?  If  we  can  offer  even 
partial  solutions  of  the  problem,  we  may  help  those 
who  come  after  us  to  get  nearer  the  whole  truth. 
In  this  particular  field,  however,  there  is  a  deal 
of  feeling  and  passion  to  be  found,  to  say  nothing 
of  prejudice,  narrowness,  ignorance  and  intoler- 
ance. In  matters  touching  everyday  comfort  and 
satisfaction,  where  misery  and  bitterness  are  often 
present,  it  is  inevitable  that  there  should  be  much 
feeling.  Moreover,  at  the  very  time  of  fierce 
agitation — perhaps  the  cause  of  much  of  it — we 
have  the  rise  of  large  fortunes,  and  as  a  conse- 
quence the  striking  contrasts  presented  between 
the  very  poor  and  the  very  rich.  As  if  this  were 
not  enough,  we  have,  as  in  the  ancien  regime,  an 

57 


LATTER-DAY  PROBLEMS 

exhibition  of  arrogance  and  show  of  wealth  which, 
to  say  the  least,  is  thoughtless  and  provocative  of 
heart-burning  and  discontent.  Thus,  if  masses 
of  men  are  untrained  in  economic  analysis,  is  it 
anything  but  natural  that  they  should  often  be- 
lieve that  inequality  of  wealth  is  the  result  of  de- 
spoiling the  poor?  And  when  unjust  privilege 
has  been  shown — as  in  the  past,  or  under  foreign 
absolutism  of  to-day — to  be  the  means  of  enrich- 
ment at  the  expense  of  others,  it  is  right  that  the 
banner  of  revolt  should  be  raised.  There  is  no 
defence  for  special  privilege.  Nevertheless,  under 
free  institutions  like  ours,  where  public  opinion 
rules,  what  is  the  case?  We  have,  also,  the  very 
rich  and  the  very  poor.  How  can  this  be  ?  Un- 
fortunately for  our  progress  in  clear  thinking,  the 
sentimentalists  have  had  almost  the  whole  stage 
to  themselves  in  the  exposition  of  causes  before  the 
general  public;  and,  worst  of  all,  some  of  them 
have  seen  gain  in  telling  the  masses  the  things 
which  it  is  believed  would  be  agreeable,  rather 
than  in  explaining  the  truth  in  its  entirety  no 
matter  how  disagreeable  it  may  be.  A  half- 
baked  economics  has  been  given  as  food  quite  too 
long;  indeed,  the  public  has  for  some  time  felt  the 
pains  of  indigestion  from  such  diet. 

58 


THE  ABOLITION  OF  POVERTY 

It  is  the  existing  state  of  discontent  which  has 
given  the  socialists  their  greatest  opportunity. 
No  doubt  the  contrasts  in  possession  of  wealth 
form  the  best  soil  for  the  socialist  propaganda. 
Inequality  of  wealth  is  by  the  discontented  taken 
as  ipso  facto  the  proof  of  injustice;  and  the  appear- 
ance of  the  red  flag  in  our  streets  is  the  measure 
of  the  numbers  of  those  who  feel  deeply  but  who 
may  be  unable  to  give  any  economic  justification 
of  their  hostility  to  existing  institutions.  It  is 
fair  to  assume  that  the  great  majority  of  men  are 
honest  in  their  beliefs,  and  that  they  really  wish 
to  arrive  at  the  truth.  Therefore,  whatever  may 
be  our  preconceptions,  it  will  not  be  amiss  to  try 
to  discuss  with  candor  the  problem  of  improving 
the  condition  of  the  very  poor.  Whether  one 
carries  conviction  to  every  one  is  not  of  first  im- 
portance; but  it  is  of  first  importance  that  there 
should  be  a  fair  field  and  a  free  discussion  from 
all  points  of  view,  before  we  fly  into  a  passion. 
Of  socialism  per  se  we  have  discoursed  in  the  last 
chapter,  but  here  and  now  we  propose  to  ask 
directly:  How  can  the  wages  of  the  poorest  class 
be  increased,  and  their  level  of  material  comfort 
be  raised?  The  answer  to  this  question  touches 
all  those  engaged  in  the  administration  of  our 

59 


LATTER-DAY  PROBLEMS 

charities,  as  well  as  those  who  are  face  to  face 
with  the  employment  of  unskilled  labor.  It 
touches  all  of  us  everywhere  who  wish  to  make 
bad  things  better. 

n 

It  is  to  the  credit  of  the  heart  of  man  that  his 
mind  has  long  been  dwelling  on  a  diversity  of 
schemes  for  banishing  poverty.  It  would  please 
us  all  to  have  some  Utopia  come  true;  but  each 
one  in  turn  has  been  rolled  under  the  heavy  car  of 
unsentimental  fact,  and  has  expired.  Yet  we 
keep  at  the  task  of  searching  for  a  solution  which 
may  have  its  justification  in  the  elemental  forces 
of  human  nature  working  in  conjunction  with  the 
actual  world  about  us.  Certainly  no  plan  will  be 
worth  the  candle  which  is  not  based  on  some  ac- 
cepted economic  analysis.  It  is  a  matter  for  a 
life-study;  and  the  emotional,  kindly  enthusiast 
must  give  way  to  the  cold  scientific  student — at 
least  to  the  point  of  a  successful  diagnosis,  and 
before  social  nursing  is  called  upon. 

Besides  socialism,  many  wonderful  remedies 
have  come  and  gone.  Anarchism,  in  its  fury  at 
the  wrongs  of  the  world,  would  like  to  destroy 
everything;  and  yet  the  poor  human  race  would 

60 


THE  ABOLITION  OF  POVERTY 

have  to  take  up  its  burden  of  organizing  society 
again,  and  tramp  the  same  old  road  of  mingled 
discouragement  and  progress  to  the  point  where 
we  are  to-day.  Society  and  government  will 
never  be  perfect  until  human  beings  are  perfect. 
Anarchism  proposes  nothing  constructive.  It  is 
a  passion,  not  a  remedy. 

In  the  train  of  socialism  are  found  many  minor 
remedies  of  which  governmental  interference  is 
the  main  constituent.  It  is  assumed  somehow  or 
other  that  bureaucracy  can  order  the  conduct  of 
others  in  such  a  way  as  to  permanently  improve 
the  material  condition  of  the  poor.  How  can  it 
raise  wages?  Under  political  pressure  the  State 
may  fix  a  rate  of  wages  for  those  in  its  employ- 
ment; but  can  it  regulate  the  market  price  of 
labor  ?  If  so,  it  must  control  not  only  the  demand, 
but  the  supply — including  the  birth-rate — in  all 
areas  where  immigration  is  possible.  This  would 
be  a  heavier  task  than  to  regulate  the  price  of 
wheat;  yet  the  State  would  hardly  attempt  that. 
But  municipal  ownership  of  various  public  ser- 
vices sometimes  appeals  to  the  wage-earners  on 
the  ground  that  wages  higher  than  the  market- 
rate  can  be  enforced.  For  the  purpose  of  getting 
the  labor  vote  this  hope  may  be  held  out;  but  it 

61 


LATTER-DAY  PROBLEMS 

can  affect  but  a  very  small  number  of  competitors 
for  employment.  And,  if  men  who  could  not  ob- 
tain high  wages  in  the  competitive  field  are  fav- 
ored by  the  State,  then  we  have  a  case  of  special 
privilege  for  a  few — rewards  paid  independently 
of  efficiency — against  which  system  no  vitupera- 
tion has  hitherto  seemed  excessive.  Just  as  soon 
as  special  favors  are  allowed,  then  the  strong,  the 
wily,  and  the  men  with  the  longest  purse  are  cer- 
tain to  win.  Such  methods  of  raising  wages  are 
impossible;  "in  this  way  madness  lies." 

To  many  minds  it  has  seemed  possible  to  re- 
construct society  and  increase  wages  by  the 
nationalization  of  land.  Henry  George's  theory 
assumes  that  the  industrial  product  is  divided,  in 
crucial  instances,  between  labor  and  land — thus 
excluding  capital.  To  the  extent  that  rent  is  paid 
for  land,  to  that  extent,  they  say,  it  is  subtracted 
from  what  should  go  to  labor.  George's  conclu- 
sion is,  in  reality,  based  upon  a  system  of  distribu- 
tion which  has  never  been  given  much  attention  by 
critics.  The  absence  of  logic  in  his  jointing  of  the 
theory  of  population,  capital  and  labor  is  one 
which  would  be  a  treasure-trove  for  a  student  of 
logical  fallacies  in  economics.  Taken  apart  from 
his  system  of  distribution,  however,  the  question 

62 


THE  ABOLITION  OF  POVERTY 

of  the  unearned  increment  was  not  original  with 
George.  The  proposal  to  wipe  out  payments  for 
unearned  increments  is  at  least  as  old  as  John 
Stuart  Mill.  Unless  the  remedy  carry  with  it  the 
abolition  of  private  property — pure  socialism, 
which  George  resented — it  was  clear  that  the 
State  must  become  responsible  for  losses  as  well 
as  gains  in  the  value  of  land;  and,  with  the  pur- 
pose to  eliminate  value  based  on  future  gains,  no 
practicable  plan  has  ever  been  presented  by  which 
innocent  investors  in  land  can  be  equitably  treated. 
Nor  is  attention  given  to  what  society  would  in- 
evitably lose  by  thus  giving  up  some  part  of  the 
existing  forms  of  property.  But  grant  all  the 
theory  demands:  How  can  nationalization  of  land 
raise  the  wages  of  the  very  poor? 

If  land  is  nationalized,  the  unearned  increment 
would  go  to  the  State.  Then  how,  as  a  conse- 
quence, are  the  very  poor  to  have  their  wages 
raised  ?  If  made  the  basis  for  remission  of  taxes, 
the  very  poor  who  pay  no  taxes  to  speak  of  are 
not  much  benefited.  Will  the  nationalization  of 
land  lead  to  the  employment  of  more  persons? 
Will  the  officials  open  a  bureau  where  applicants 
may  get  a  supplement  to  market  wages?  Who 
will  decide  what  should  be  given  a  street-sweeper, 

63 


LATTER-DAY  PROBLEMS 

what  to  a  locomotive-driver?  Or,  if  the  State 
gets  control  of  this  magnificent  fund,  will  politics 
be  purer  than  they  are  now,  and  will  the  grafters 
or  the  laborers  get  the  most?  In  such  a  game, 
will  not  the  clever  and  unscrupulous  get  the  lion's 
share;  and  where  will  the  inexperienced  working 
man  come  in?  George's  scheme  is  one  which 
misses  the  central  point  of  attack;  it  deals  with 
external  rather  than  with  vital  things  affecting 
wages.  To  emphasize  the  question  of  land  is  to 
draw  attention  away  from  an  essential  reason  for 
higher  wages — the  improvement  in  the  productive 
capacity  of  the  man.  It  is  theory,  pure  theory; 
and  a  nationalization  of  land,  no  matter  how 
strongly  it  appeals  to  many  high-minded  enthu- 
siasts, offers  us  no  definite  means  for  getting 
higher  wages  for  the  very  poor. 

Next,  quite  distinct  from  the  idealistic  plans  of 
the  socialists,  we  have  the  immediate  business  de- 
mands of  the  labor  unions  for  higher  wages,  less 
hours  of  labor,  and  some  control  over  the  industry 
in  which  they  work.  Here  is  a  direct  object,  to 
be  gained,  as  explained  elsewhere,1  by  the  method 
of  monopolizing  the  supply  of  labor  permitted  to 
compete.  The  non-union  man  is  left  outside  the 

1  Chapter  I. 
64 


THE  ABOLITION  OF  POVERTY 

breastworks.  In  all  strikes,  it  seems  to  have  been 
generally  admitted  that  unions  composed  of  un- 
skilled labor,  such  as  the  teamsters,  are  easily 
beaten  by  the  unlimited  supply  of  unskilled  labor 
which  can  be  brought  into  competition  at  any  point ; 
and  that  the  only  means  of  success  in  that  grade  of 
labor  is  by  the  use  of  force  against  non-union  men. 

But  it  is  this  very  class  of  the  unskilled  that  we 
are  most  concerned  with.  Can  the  unions  pro- 
vide a  plan  for  giving  them  regular  employment, 
and  raising  their  wages?  Can  they  abolish  pov- 
erty? Obviously,  the  principle  of  monopoly, 
under  which  unionism  works,  cannot  regulate  the 
demand  of  employers  for  all  of  the  unskilled  labor 
in  existence ;  nor  can  it  control  the  supply  of  com- 
petitors— for  it  is  in  this  class  that  the  birth-rate  is 
the  highest  and  immigration  the  most  considerable. 
Whatever  may  be  done  by  the  unions — which  in- 
clude perhaps  seven  to  ten  per  cent,  of  the  so-called 
laboring  classes  in  our  country — they  are  least 
effective  in  the  problem  of  helping  the  very  poor. 

Then,  we  are  offered  the  aid  of  co-operation, 
profit-sharing,  and  minor  proposals  like  con- 
sumers' leagues.  Their  help  is  not  to  be  despised ; 
they  add  to  the  sum  total  of  gains  for  many  classes ; 
but  co-operation  and  profit-sharing  are  for  those 

65 


LATTER-DAY  PROBLEMS 

who  already  have  made  progress  up  the  industrial 
ladder,  and  who  are  in  a  position  to  go  higher. 
And  consumers'  leagues  deal  more  with  sanitary 
than  economic  affairs;  they  may  assure  us  that 
goods  will  not  be  produced  in  pest-breeding  sweat- 
shops, but  they  cannot  pretend  to  control  the  sup- 
ply of  labor,  or  the  demand  for  it,  and  thus  raise 
the  wages  of  the  worst  paid  labor. 

m 

In  default  of  success  in  solving  the  riddle  by  the 
various  schemes  thus  proposed,  we  are  obliged  to 
resort  to  the  constructive  proposals  which  follow 
from  the  results  attained  by  economic  science. 
An  economic  analysis  of  the  forces  influencing 
changes  in  the  conditions  of  the  worst  paid  labor- 
ing classes,  while  presented  with  due  regard  to 
one's  personal  shortcomings,  ought,  however,  to 
be  received  as  an  honest  attempt  to  treat  the  in- 
quiry from  a  serious  point  of  view.  The  out- 
come may  not  satisfy  those  whose  convictions  are 
already  immutable,  but  it  may  force  the  thinking 
along  lines  different  from  those  in  the  plans  above 
examined. 

Nor  is  our  objective — which  is  ascertaining  the 
means  of  raising  the  level  of  comfort  of  the  very 

66 


THE  ABOLITION  OF  POVERTY 

poor — much  different  in  kind  from  that  which  the 
statesman  must  face  in  studying  how  to  elevate 
an  inferior  race.  It  involves  an  investigation  into 
the  psychological  and  educative  processes  by 
which  human  nature  may  be  led  to  create  an  in- 
creased amount  of  economic  satisfactions.  The 
problem  first  faced  by  General  Armstrong  at 
Hampton,  and  which  confronts  Booker  T.  Wash- 
ington at  Tuskegee,  is  practically  the  same  which 
confronts  us,  when  we  wish  to  raise  the  level  of  eco- 
nomic satisfactions  obtained  by  the  worst  paid 
classes  in  existing  society.  With  this  problem 
economics  has  long  been  familiar.  It  is  a  truism 
to  recite  that  an  increase  in  the  production  of 
material  wealth  has  its  stimulus  in  the  creation, 
or  greater  intensity,  of  human  wants.  A  people 
without  ambition,  without  a  desire  for  improve- 
ment, without  a  wish  for  a  product  strong  enough 
to  overcome  the  obstacles  nature  presents  to  its 
growth  or  manufacture,  cannot  increase  its  eco- 
nomic well-being.  Sloth,  idleness,  indifference, 
and  lack  of  self-control  enough  to  endure  a  pres- 
ent sacrifice  for  the  sake  of  a  future  gain,  will 
block  economic  progress  for  the  class  we  have  in 
mind.  At  Tuskegee,  Mr.  Washington  reports 
that  his  pupils  already  have  the  intensity  of  wants 

67 


LATTER-DAY  PROBLEMS 

which  makes  them  ready  for  the  learning  of  prac- 
tical methods  for  producing  that  which  will  sup- 
ply their  wants.  If  wants,  however,  do  not  exist 
in  a  class  long  submerged  in  misery,  poverty,  and 
hopelessness,  the  very  first  step  is  to  excite  their 
wants — even  if  only  for  better  clothing,  food  and 
primary  necessities.  Perhaps  this  point  may 
seem  to  the  well-fed,  self- sufficient  members  of 
our  community  as  rather  academic.  But  the 
facts  cannot  be  blinked.  Only  too  many  of  those 
we  are  now  concerned  with  have  come  to  believe 
that  the  world  is  against  them,  that  their  lot  is 
unchangeable  by  individual  effort,  and  that  help 
can  come  only  from  outside  themselves.  This  is 
the  reason  why  socialism,  or  paternalism,  appeals 
to  them  so  strongly;  the  cause  why  their  material 
satisfactions  are  so  small  is  agreeably  placed  upon 
the  forms,  or  upon  the  action,  of  the  State,  rather 
than  upon  their  own  productive  inefficiency. 
Therefore,  without  spinning  fine  webs  of  theory, 
we  find  ourselves  thus  early  in  our  quest  in 
possession  of  one  of  the  general  requirements 
for  the  relief  of  the  very  poor.  That  is,  their 
wants  must  be  enlarged  and  made  more  intense. 
These  conditions  are  absolutely  essential  to 
progress. 

68 


THE  ABOLITION  OF  POVERTY 

Of  course,  we  must  be  prepared  for  a  disdain- 
ful curl  of  the  lip  from  the  cock-sure  social  doctor, 
who  informs  us  that  the  slums  are  full  of  those 
who  have  more  wants  than  means  of  supplying 
them.  Possibly  so;  but  how  many  wish  un- 
limited satisfactions  and  yet  are  unwilling  to  give 
up  indulgences  in  order  to  get  them?  Such  an 
attitude  is  not  to  the  point.  Wants  must  be 
strong  enough  to  give  rise  to  productive  effort, 
and  the  exercise  of  all  the  homely  qualities  essen- 
tial to  patient  industry.  There  must  be  kept  in 
mind,  too,  that  wants  are  both  good  and  evil; 
and  that  the  increase  of  wants  which  have  only 
evil  influences  has  no  gain  for  the  very  poor.  In 
fact,  they  are  often  poor  because  their  wants  are 
of  the  wrong  kind.  The  great  trouble  too  often 
is  that  wealth  is  wanted  fiercely  enough,  but  that 
the  mind  is  constantly  occupied  in  devising 
schemes  by  which  it  can  be  got  without  the  usual 
sacrifices  of  effort  and  abstinence.  Here  is  the 
paradise  of  the  get-rich-quick  promoters;  and 
here  is  the  chance  to  tell  the  gullible  that  others 
are  getting  rich  at  their  expense. 

Yet  on  the  other  hand,  there  is  an  increase  of 
strong  incentives  to  new  and  more  intense  wants, 
which  are  in  fact  supplying  a  firm  basis  for  prog- 

69 


LATTER-DAY  PROBLEMS 

ress  in  economic  comfort.  Indeed,  one  of  the  hope- 
ful things  in  the  present  situation — although  one 
which  to  many  seems  a  very  presage  of  revolution — 
is  the  wide-spread  discontent  with  existing  economic 
rewards.  The  industrial  unrest,  which  causes 
anxiety  in  some  quarters,  is,  to  my  mind,  a  healthy 
and  hopeful  sign  of  coming  progress  for  the  classes 
we  have  in  mind;  because  it  is  the  indication  of 
ambition  and  a  growing  intensity  of  economic 
wants,  without  which  practical  proposals  for  in- 
creased productive  efficiency  would  be  futile.  It 
has  long  been  a  commonplace  that  international 
trade  has  been  an  incentive  to  civilization  and 
commerce  with  inferior  races  because  the  presen- 
tation to  the  mind  of  new  articles  and  new  methods 
starts  fresh  desires  and  is  followed  by  the  wish  to 
satisfy  these  desires.  But  to-day  with  us  the  pos- 
sibility of  stolid  aquiescence  in  poverty  is  less 
likely  than  ever  before.  In  fact,  the  arrogant  dis- 
play of  wealth,  which  is  so  often  vulgar,  is  itself, 
by  dint  of  great  contrasts,  a  means  of  exciting  the 
very  poor  to  discontent,  and  to  a  wish  to  enjoy  the 
comforts  possessed  by  others.  Of  course,  this 
incentive  contains  in  itself  potential  danger, 
should  men  be  taught  that  these  stimulated  de- 
sires for  wealth  can  be  satisfied  in  any  other  than 

70 


THE  ABOLITION  OF  POVERTY 

legitimate  means.  Still  emulation  and  imitation 
remain  strong  causes  to  aid  in  improving  the  con- 
dition of  the  very  poor. 

Furthermore,  it  may  be  possible  to  bring  into 
existence  new  desires,  such  as  the  pleasure  arising 
from  knowing  that  a  sum  has  been  saved  and  put 
away  to  meet  an  unexpected  need  in  the  future. 
Much  economic  progress  depends  upon  the  kind 
of  desires  which  are  given  strong  emphasis.  In 
this  connection,  we  are  led  to  indicate  the  point  of 
contact  between  psychology  and  economics.  Hav- 
ing made  the  economic  analysis,  we  have  a  right 
here  to  call  upon  the  psychologist  to  inform  us  how 
the  human  mind  can  best  be  touched  to  bring 
about  the  desired  action  by  the  individual.  Not 
only  is  it  a  question  as  to  how  desires  may  be 
created  or  stimulated,  but  how  to  repress  unfortu- 
nate desires,  and  to  incite  wholesome  desires.  Here 
is  a  wide,  but  uncultivated,  field  upon  which  we 
cannot  enter,  even  if  competent;  for,  as  yet,  no 
study  of  this  psycho-economic  and  much-needed 
problem  has  been  made.  Here  is  where  psy- 
chology has  a  large  practical  work  to  do  for  the 
help  of  organized  charity  and  for  the  economist 
who  is  engaged  in  improving  the  condition  of  the 
poor.  Indeed,  the  literature  of  the  consumers' 


LATTER-DAY  PROBLEMS 

league  rather  loosely  argues  that  society  is  to  be 
saved  only  through  changing  the  ways  of  consump- 
tion. That  is,  perhaps,  only  another  way  of  say- 
ing that  society  can  be  saved  only  by  making  men 
better.  For,  if  we  assume  that  we  can  make  men 
have  only  wholesome  desires,  we  have  made 
human  nature  perfect.  It  is  a  large  contract, 
even  for  the  Church,  to  make  the  whole  world 
perfect;  but  we  approve  of  the  intention.  For 
our  present  objective,  we  need  to  ask  psychology 
for  practical  schemes  to  stimulate  and  to  create 
desires  for  more  economic  comfort — as  well  as  for 
desires  of  a  legitimate  kind  and  for  sufficient  char- 
acter in  the  worker  to  persist  throughout  the  eco- 
nomic processes  needed  for  the  continued  pro- 
duction of  what  will  satisfy  these  desires. 

IV 

Given  the  desire  for  satisfactions  and  the  willing- 
ness to  produce,  then,  we  are  face  to  face  with  the 
need  of  practical  methods  of  teaching  the  very 
poor  how  to  produce.  What  a  man  can  consume 
is,  generally  speaking,  what  he  can  produce;  in- 
crease his  productivity,  and  you  will  increase  his 
control  over  the  consumption  of  the  articles 
which  satisfy  his  wants.  But  before  making 

72 


THE  ABOLITION  OF  POVERTY 

specific  suggestions  for  augmenting  productive 
power,  it  is  necessary  to  refer  to  a  way  by  which 
the  very  poor  must  first  be  tested.  They  are 
usually  herded  in  crowded  city  districts.  First 
of  all,  those  who  are  willing  must  be  separated 
from  those  who  are  unwilling  to  work.  The 
criminal,  the  lazy,  the  intemperate,  the  degenerate 
stand  in  an  entirely  different  class  from  the  un- 
fortunate, the  ignorant,  the  unskilled,  and  the 
temporarily  disabled.  The  problem  of  treatment 
of  the  former  is  not  an  economic,  but  a  political 
and  social  one;  while  the  case  of  the  latter  is 
primarily  an  economic  one.  Keeping  this  separa- 
tion in  mind,  what  practical  test  can  be  offered  to 
distinguish  between  the  two  kinds?  The  answer 
is,  the  offer  of  work.  But,  says  an  objector,  shall 
the  municipality  assume  the  whole  labor  bill  of 
the  unemployed?  Not  necessarily.  In  the  first 
place,  municipal  employment  agencies  are  means 
yet  untried  to  any  extent;  the  means  of  connect- 
ing the  special  demand  with  the  special  labor  is 
capable  of  very  great  development.  More  than  that, 
some  of  the  ideas  connected  with  the  antiquated 
poor-house  system  are  capable  of  great  variation. 
Indeed,  the  Salvation  Army  has  already  shown 
the  way.  For  instance,  farm  labor  is  exceedingly 

73 


LATTER-DAY  PROBLEMS 

scarce;  and  immense  tracts  of  land  are  almost 
untouched.  Let  the  municipality  join  with  or- 
ganized charity  associations,  and  enable  all  those 
who  are  willing  to  be  set  to  work  upon  the  land. 
In  case  of  ignorance,  an  intermediate  period  may 
be  spent  under  skilled  agricultural  instructors, 
until  the  laborer  can  be  sent  to  his  own  plot,  where 
in  due  time  he  should  be  able  to  pay  for  his  home 
while  living  a  life  of  independence  and  honest  toil. 
The  cost  of  this  method  would  be  the  advances 
for  instruction  and  for  the  land,  the  outlay  for 
which  is  to  be  repaid — a  small  outlay  compared 
with  sums  otherwise  spent  for  relief,  and  small  as 
considered  from  the  point  of  view  of  possible 
paupers  changed  to  self-respecting  owners  of  land. 
In  a  community  whose  ranks  are  well  shaken  into 
place  movement  is  probably  an  extreme  remedy, 
to  be  resorted  to  only  by  the  consent  of  those  con- 
cerned ;  but  in  a  new  country  like  ours,  voluntary 
movement  would  be  quite  effective.  Moreover, 
many  may  not  be  suited  for  the  land,  and  training 
for  other  and  mechanical  industries  must  be  kept 
open  by  industrial  education.  To  be  sure,  all  this 
is  not  as  easy  as  it  looks.  In  spite  of  the  misery  of 
poverty,  great  numbers  will  balk  at  continuous 
labor,  and  yearn  for  the  heated  dens  of  the  gay 

74 


THE  ABOLITION  OF  POVERTY 

city  where  the  social  instinct  tends  to  hold  them. 
In  that  case,  they  must  be  practically  regarded  as 
having  gone  over  to  the  other  class  of  the  helpless 
and  defectives,  and  be  treated  in  a  different  way. 
This  trial  method  of  testing  the  poor  and  un- 
employed has  the  additional  advantage  of  falling 
in  with  a  general  economic  principle  upon  which 
we  must  constantly  rely  in  this  discussion.  Wages 
are  low  where  employment  is  scarce  and  numbers 
are  great.  If  laborers  are  taken  away  from  con- 
gested city  districts  to  the  land,  they  are  placed 
where  supply  is  in  a  far  better  adjustment  to  de- 
mand. It  is  a  principle  of  wide  application  for 
our  special  purpose.  When  we  speak  of  increas- 
ing the  productive  efficiency  of  the  very  poor  in 
order  to  give  them  greater  consuming  power,  we 
refer  to  the  hope  of  finding  practical  means  of 
taking  them  out  of  the  crowded  class  where  de- 
mand for  them  is  less  relatively  to  the  supply,  and 
carrying  them  up  to  a  less  crowded  class,  where 
demand  is  greater  relatively  to  the  supply.  More 
than  that,  it  is  a  method  consistent  with  the  gen- 
eral theory  of  value  by  which  anything,  goods  or 
labor,  when  given  greater  utility,  gains  greater  ex- 
change value.  To  make  a  laborer  more  efficient 
in  production,  other  things  remaining  the  same, 

75 


LATTER-DAY  PROBLEMS 

increases  his  pay  and  his  worth  to  his  employer, 
just  as  improving  the  quality  and  power  of  a  loco- 
motive increases  its  value  to  a  railway.  Increased 
efficiency  is  to  a  laborer  what  increased  utility  is 
to  a  commodity.  But  while  supply  is  in  the  long 
run  dominant  even  over  utility,  the  effect  of  in- 
creased efficiency,  as  human  beings  go,  works  in 
practice  not  only  to  increase  his  utility  to  his  em- 
ployer, but  also  to  place  him  where  the  supply  of  his 
kind  of  labor  is  less.  Higher  wages  are,  therefore, 
in  the  natural  course  of  events,  almost  inevitable, 
when  efficiency  is  improved. 

It  has  been  necessary  to  ask  the  indulgence 
of  the  reader  in  thus  introducing — even  though 
briefly — some  dry  economic  exposition ;  but  it  has 
been  done  in  order  that  we  might  make  use  of  it 
as  a  basis  for  some  practical  suggestions  for  bring- 
ing about  higher  wages.  For,  in  the  main,  it  can 
be  settled  that  unless  a  proposal  for  helping  the 
very  poor  meets  the  following  requirements,  it  can 
have  no  permanent  results  of  a  helpful  character: 

It  must  (i)  either  reduce  the  supply  of  labor  at 
a  particular  point  of  competition,  or  (2)  it  must 
operate  in  some  way  to  increase  the  demand  for 
that  special  kind  of  labor;  and  it  can  accomplish 
this  latter  end  usually  by  giving  labor  more  effi- 

76 


THE  ABOLITION  OF  POVERTY 

ciency  in  the  place  where  it  resides.  From  the  ex- 
position above  given  we  have  thus  obtained  some 
general  tests  to  be  applied  to  every  plan  for  aid- 
ing the  very  poor. 

Labor,  moreover,  is  not  of  one  kind;  it  should 
never  be  reasoned  about  en  bloc.  Nor  is  there 
such  a  thing  as  a  demand  for  labor  as  a  whole. 
Labor  appears  in  strata,  as  regards  skill  and  in- 
dustrial efficiency;  and  demand  is,  in  fact,  a  de- 
mand for  one  or  more  men  adapted  for  a  specific 
kind  of  work.  Roughly  speaking,  the  situation 
may  be  generally  expressed  by  the  accompanying 
diagram,  in  which  A  represents  the  poorest  paid 


\<-D 


unskilled  class,  with  which  we  are  concerned, 
lying  underneath  other  classes  rising  in  skill  and 
efficiency  from  B  to  E.  Demand,  moreover,  in 
any  one  industry  is  for  some  labor  of  all  classes; 
and  in  a  country  as  a  whole,  demand  is  a  sum  of 

77 


LATTER-DAY  PROBLEMS 

demands  in  all  industries  for  men  of  the  A  class, 
or  the  B  class,  etc.  For  our  present  purpose  we 
are  concerned  with  the  problem  of  raising  the  A 
class  to  a  higher  level.  As  things  now  stand,  the 
members  of  the  A  class  are  the  least  well  paid,  be- 
cause their  numbers  are  larger  relatively  to  the 
demand  for  them  than  those  of  the  classes  above; 
and  it  is  the  class  in  which  numbers  are  most 
thoughtlessly  brought  into  the  world.  Now  our 
objective  emerges  clearly  before  us:  How  can  we 
reduce  the  numbers  of  A,  or  increase  their  utility 
to  industry,  so  that  their  wages  may  be  larger? 

(1)  In  the  first  place,  a  permanent  effect  can  be 
produced  only  by  increasing  the  industrial  skill 
and  efficiency  of  the  members  of  class  A.    Every 
one  knows  that  skilled  gets  more  than  unskilled 
labor.    Moreover,   if  the  skilled   man   turns  in 
more  product,  the  employer  can  afford  to  give  him 
more  wages,  no  matter  what  happens  elsewhere. 
Then,  if  the  man  moves  up  out  of  A,  he  gets  into 
a  situation  where  demand  for  his  sort  is  stronger 
and  more  extended, and  yet  where  it  is  less  crowded. 
Consequently,  we  ask:  how  can  we  start  men  to 
moving  up  and  out  from  the  A  class? 

(2)  Obviously,  the  most  effective  plan  ready  to 
our  hands  is  industrial  education  and  manual 

78 


THE  ABOLITION  OF  POVERTY 

training.  General  education  in  the  public  school 
helps,  so  far  as  it  gives  control  over  essentials  and 
really  sharpens  the  mind;  but  for  definite  eco- 
nomic progress  it  is  very  far  from  sufficient.  As 
yet  it  may  be  safely  said  that  industrial  education 
is  almost  untried  in  our  country,  at  least  for  the 
classes  (such  as  the  A  class)  most  in  need  of  it. 
For  many  poor  people  among  us,  who  need  the 
direct  means  of  earning  a  subsistence,  it  is  rather 
absurd  to  give  them  the  studies  of  the  leisure  class. 
Also,  many  a  boy  dull  in  mathematics  or  science 
may  have  a  good  eye  and  a  steady  arm,  and  may 
make  a  skilful  carpenter  or  bricklayer.  Of  course, 
the  possibilities  are  as  wide  as  the  diversity  of 
men.  Germany  is  far  ahead  of  us  in  providing 
technical  schools  for  the  artisan  class.  In  short, 
we  should  make  it  as  easy  in  our  public  schools  for 
a  boy  or  girl  to  obtain  training  in  mechanics, 
plumbing,  woodworking,  cooking,  telegraphy,  etc., 
etc.,  as  in  geometry  or  chemistry.  All  this  applies 
to  women  as  well  as  to  men.  Women's  wages  are 
low  because  they  are  usually  unskilled  and  also 
in  a  crowded  class.  Our  cities  and  our  towns 
should  be  dotted  with  training  schools  suitable  for 
giving  practical  preparation  for  agriculture,  manu- 
factures, and  commerce.  At  present,  the  unem- 

79 


LATTER-DAY  PROBLEMS 

ployed  or  the  very  poor  have  no  trade  of  any  kind, 
or  are  confined  to  some  one  habitual  task,  like 
sewing  on  clothing  cut  by  machinery.  To-day, 
when  carpenters  or  plumbers  get  five  dollars  for 
a  day  of  short  hours,  and  even  "make  work,"  no 
man  handy  with  tools  need  be  poor  or  out  of 
employment  long.  It  should  not  be  necessary 
to  press  this  matter  upon  the  reader:  its  effective- 
ness for  increasing  the  wages  of  the  very  poor 
must  appear  at  a  glance.  In  addition,  its  ulti- 
mate end  is  to  inculcate  individual  independence 
and  self-respect;  it  frees  the  laborer  from  servile 
dependence  for  his  post  upon  the  mere  caprice  of 
an  employer.  The  increased  efficiency  given  to 
an  unskilled  man  increases  his  utility  to  his  em- 
ployer and  increases  the  demand  for  his  services. 
Of  course,  it  may  be  objected  that  if  all  the 
members  of  A  were  so  far  improved  as  to  be  spread 
over  B,  C,  D,  and  E,  these  other  classes  would  be 
overcrowded  and  their  wages  lowered.  First,  it 
is  to  be  replied,  the  A  class  will  always  be  with  us, 
so  long  as  human  beings  are  imperfect  and  short- 
sighted; nor  can  all  of  them  be  improved  to  the 
extent  mentioned.  But  grant  that  this  were  pos- 
sible; it  would  be  greatly  to  be  desired.  In  such 
a  case,  the  change  in  relative  efficiency  of  various 

80 


THE  ABOLITION  OF  POVERTY 

groups  would  cause  some  readjustment;  but,  the 
total  efficiency  of  all  the  labor  force  having  been 
increased,  the  total  output  of  wealth  created  out 
of  our  resources  in  conjunction  with  capital 
would  be  greatly  augmented.  Thus  there  would 
be  more  than  before  to  be  distributed  amongst 
the  classes  from  A  to  E,  in  the  proportion  of  their 
relative  efficiency.  That  is,  as  elsewhere  ex- 
plained,1 the  contest  for  large  shares  lies  between 
different  classes  of  men,  as  physical  and  mental 
laborers  (E  being  the  class  of  skilled  organizers), 
and  not  between  labor  and  capital  as  such.  Any 
gain,  at  any  point,  in  industrial  efficiency,  there- 
fore, enures  to  the  advantage  of  society.  Like 
rain  in  a  period  of  drought,  it  cannot  fall  anywhere 
without  making  the  planted  crops  grow,  thus 
benefiting  the  single  farmer  as  well  as  the  neigh- 
bor with  whom  he  trades. 

(3)  At  this  point,  it  is  well  to  indicate  that  we 
have  a  duty  even  to  those  who  are  unwilling  to 
work,  to  those  who  are  "down  on  their  luck." 
One  is  not  yet  ready  to  believe  that  because  a  man 
stumbles  and  falls  he  will  be  unable  to  walk 
again.  There  is  no  doubt  that  we  have  here  a 
delicate  and  difficult  task,  if  we  hope  to  touch 

1  Chapter  II,  page  50. 
8l 


LATTER-DAY  PROBLEMS 

springs  of  action  in  those  who  have  lost  their  self- 
respect.  But  it  has  been  done;  and  by  experience 
and  insight  it  can  be  done  again,  and  for  more 
persons.  It  is  impossible  in  this  brief  study,  to 
go  to  any  length  into  the  details  about  the  ex- 
periments which  have  been  more  or  less  success- 
ful in  this  respect.  Yet  there  are  practical  suc- 
cesses, which  are  enough  to  make  us  feel  that  we 
need  not  count  out  of  our  working  force  at  any 
time  all  those  who  at  first  show  a  disinclination 
to  work. 

In  the  main,  for  this  whole  class  of  the  lazy, 
dishonest,  and  degenerate,  there  should  be  en- 
forced care  and  work;  and,  above  all,  there  should 
be  watched  the  new  emphasis  now  being  given 
upon  training  men  to  be  the  guides  and  teachers 
of  this  class  of  persons.  It  is  a  new  and  distinct 
profession  for  which  economic  and  other  courses 
are  to  form  a  basis  for  their  professional  training. 

(4)  There  is  still  another  kind  of  instrument 
within  our  reach.  Any  one  familiar  with  in- 
dustry cannot  fail  to  notice  the  advantage  given 
to  the  possessor  by  a  sum  of  capital,  be  it  large  or 
small.  Specifically  it  gives  him  power  over  the 
future;  and  yet  it  has  the  magic  of  all  things  in 
the  hand  as  against  those  in  the  bush.  It  is 

82 


THE  ABOLITION  OF  POVERTY 

power,  to  be  used  for  good  or  for  ill.  Therefore, 
if  we  wish  to  aid  the  very  poor,  we  should  try  to 
help  them  become  capitalists.  This  may  sound 
aggravating  to  those  who  are  as  yet  struggling  for 
mere  existence;  but,  in  spite  of  possible  scepticism 
on  this  point,  it  is  a  practical  matter  not  to  be 
overlooked.  The  attitude  to  saving  is  crucial; 
and  this  should  be  emphasized  in  spite  of  the 
prevalence  of  superficial  thinking  on  this  subject 
by  some  workers  among  the  very  poor.  Saving 
arises  from  the  ability  to  set  a  future  gain  above  a 
present  indulgence ;  and  it  is  a  point  of  view  neces- 
sary in  many  other  relations  in  which  the  very 
poor  find  themselves,  especially  in  the  practical 
question  of  the  control  over  births.  Once  get  the 
mental  attitude  of  saving  recognized,  the  result 
will  bring  a  gain  all  along  the  line.  Of  course, 
everything  depends  upon  what  kind  of  future 
gain  is  given  emphasis;  but  saving  and  its  bene- 
ficial results  are  not  to  be  disposed  of  because 
some  savers  are  likely  to  be  niggards.  It  is  no 
argument  against  the  principle  of  saving  that  a 
man  may  get  so  "near"  as  to  refuse  an  orange  to 
a  sick  wife,  or  store  up  money  for  the  sake  of  a 
pretentious  funeral;  for  this  is  not  true  saving. 
The  influence  of  saving  upon  character  is  great, 

83 


LATTER-DAY  PROBLEMS 

quite  apart  from  the  fact  that  the  possession  of 
even  a  little  capital  places  a  man  beyond  the  ill 
effects  of  temporary  unemployment.  And  the 
possibility  of  saving  exists  wherever  the  drink  or 
tobacco  bill  exists.  Finally,  the  possession  of 
capital  will  bring  reinforcements  to  the  wages  of 
labor,  and  helpfully  increase  the  stability  of  his 
position. 

(5)  In  close  connection  with  the  quality  of  self- 
mastery  required  in  saving,  it  is  to  be  noted  that  a 
gain  in  productive  efficiency — by  which  a  man 
may  rise  out  of  the  class  of  the  very  poor — is  largely 
a  question  of  character.  The  power  to  select  a 
definite  object  and  to  keep  to  it  without  being 
deflected  by  weakly  yielding  to  distracting  diver- 
sions is  a  condition  of  success  in  industry.  Such 
self-mastery  is  but  another  name  for  character. 
Indeed,  the  moral  purpose  behind  the  expendi- 
ture of  increased  wages  is  quite  as  essential  as  the 
material  gain  itself.  Therefore,  a  large  part  of 
the  philosophy  of  success  to  be  presented  to  the 
very  poor  is  a  grasp  upon  the  pivotal  things  in 
character.  Obviously  this  seems  like  academic 
preaching;  but,  at  least,  it  brings  out  the  truth 
that  the  problem  of  raising  the  very  poor  is  not  a 
matter  to  be  finished  in  the  twinkling  of  an  eye; 

84 


THE  ABOLITION  OF  POVERTY 

it  is  a  matter  of  time  and  patience.  Indeed,  as 
improvement  in  industrial  efficiency  is  so  largely 
a  question  of  character,  it  becomes  evident  that  it 
is  pretty  nearly  synonymous  with  making  people 
good.  In  this  task  the  church  has  been  engaged 
for  centuries,  and  men  are  not  yet  perfect.  Thus 
we  should  not  be  discouraged  if  plans  for  abolish- 
ing poverty  work  with  exceeding  slowness.  For 
instance,  it  is  not  to  be  assumed  that  the  gain  in 
industrial  efficiency  given  at  Hampton  or  Tuske- 
gee  will  be  lasting  unless  it  is  accompanied  by  some 
growth  in  a  moral  purpose. 

The  limits  of  space  obviously  prevent  the 
writer  from  giving  more  concrete  expression  to 
plans  for  the  aid  of  the  very  poor,  or  to  discuss 
experiments  already  undertaken.  It  has  seemed 
best  to  analyze  and  to  order  the  thinking  on  this 
subject  in  such  a  way  as  to  enable  us  to  apply 
general  tests  of  existing  or  proposed  methods,  and 
to  know  what  sort  of  new  schemes  should  be  or- 
ganized which  would  conform  to  the  demands  of 
sound  economics.  To  my  mind,  if  we  have  agreed 
that  gain  in  industrial  efficiency  is  a  means  of 
raising  wages,  through  increasing  the  demand  for 
that  labor  and  lowering  its  relative  supply,  it 
would  be  just  as  appropriate  to  use  taxation  for 

85 


LATTER-DAY  PROBLEMS 

this  result  as  it  would  be  to  use  it  for  the  establish- 
ment of  a  public  school  system,  for  the  construc- 
tion of  roads  and  bridges,  or  for  the  extension  of 
rural  delivery.  That  is,  encouragement  to  the 
accumulation  of  capital  by  postal  savings  banks, 
by  agricultural  loan  banks,  by  co-operative  build- 
ing societies,  or  the  wide  extension  of  industrial 
and  manual  training  at  the  public  expense,  should 
be  cordially  supported  in  the  interest  of  the  very 
poor.  Preparation  for  earning  a  livelihood  ought 
not  to  be  limited  to  arithmetic,  grammar,  and  the 
like.  And  this  must  go  hand  in  hand  with  a  wider 
diffusion  of  economic  instruction. 

In  conclusion,  it  cannot  have  escaped  the 
reader's  mind  that,  with  all  these  practical  schemes 
at  work,  there  would  still  remain  a  substratum 
in  Class  A  beyond  the  reach  of  improvement  be- 
cause of  native  incompetence,  stupidity,  or  flabby 
character.  What  nature  has  joined  together  man 
is  not  likely  to  put  asunder.  For  such  a  residuum 
there  will  remain  only  the  services  of  public  and 
private  philanthropy ;  but  help  to  the  unfortunates 
is  to  the  fortunate  a  duty,  which  kindly  human 
nature  will  not  shirk,  in  a  community  where  hos- 
pitals, homes  for  incurables,  and  the  like  are  fast 
becoming  a  matter  of  course.  But,  if  we  are  able 

86 


THE  ABOLITION  OF  POVERTY 

to  reach  a  steadily  increasing  number  of  the  will- 
ing poor  by  means  of  our  economic  methods  and 
are  able  to  get  them  moving  toward  permanent 
self-maintenance,  we  shall  have  done  much  of  that 
which  is  humanly  possible. 


CHAPTER  IV 
SOCIAL  SETTLEMENTS 


THE  close  of  the  nineteenth  century  was 
marked  by  the  rise  of  an  unmistakable 
moral  sentiment  and  philanthropy.  The  air 
came  to  be  filled  with  an  ardent  altruism.  A 
glowing  idealism  began  to  mark  our  literature 
and  our  academic  activity.  Its  chivalrous  de- 
sire to  make  the  world  better  is  still  with  us,  and 
we  all  have  a  distinct  feeling  of  pride  that  our 
kind  have  been  able  to  bring  such  altruism  to 
fruition.  Whatever  the  exciting  cause — whether 
or  not  the  outcome  was  the  immigration  from 
England  of  the  fine  spirit  set  aflame  by  Maurice, 
Kingsley,  Green,  and  Morris — our  own  genera- 
tion here  has  felt  the  touch  of  a  passion  for  right- 
eousness the  like  of  which  has  not  been  known  for 
many  a  decade.  It  is  a  thing  to  be  proud  of;  a 
thing  which  increases  our  faith  in  man, — in  spite 
of  the  ugly  dragons  which  it  is  obliged  to  drive  out 

88 


SOCIAL  SETTLEMENTS 

of  its  pathway.  Possibly  the  sordid  meanness  of 
selfish  struggles  for  power  and  wealth  in  politics 
and  industry,  in  these  last  decades,  has  given  a 
need  to  which  this  spirit  was  an  immediate  re- 
sponse. This  zeal  to  make  bad  things  better  ap- 
peals to  all  of  us  high  and  low;  and  so  far  as  in  us 
lies  we  all  wish  to  help  on  the  coming  of  the  dawn. 
In  this  spirit,  which  aims  to  further,  rather  than 
to  hinder,  the  progress  of  kindness  among  men, 
and  to  spread  farther  and  extend  deeper  the  cura- 
tive processes  in  society,  it  will  be  permitted,  I  am 
sure,  to  examine  searchingly  the  aims  and  methods 
by  which  the  so-called  "new  philanthropy"  is 
trying  to  work  out  its  undeniably  lofty  purposes. 
No  doubt  any  one  who  attempts  to  question  any 
part  of  the  programme  is  in  danger  of  being  mis- 
understood and  of  being  vehemently  set  upon  as 
a  hostile,  cold-blooded,  and  unsympathetic  out- 
sider; but  even  at  that  risk,  one  who  is  really  in- 
terested in  seeing  the  reign  of  better  things  be- 
come a  permanent  condition  of  our  life  will  be 
justified  in  the  hope  that  he  will  be  at  least  granted 
the  possession  of  an  honest  purpose.  When  a 
dog-sledge  party  is  being  sent  to  rescue  a  lost 
explorer  in  the  arctic  snows,  it  is  not  hostility, 
but  real  vital  wisdom,  to  insist  that  the  expedition 


LATTER-DAY  PROBLEMS 

shall  go  with  food  and  supplies  sufficient  for  all 
possible  needs,  and  not  with  empty  sleds  driven 
only  by  excitable  enthusiasts. 

The  course  of  this  admirable  renaissance  of 
philanthropy  has  now  run  so  long  that  we  are  in  a 
position  to  take  stock  of  results,  and  to  put  the 
methods  to  some  tests  of  common  sense.  And  as 
the  finest  and  best  results  have  appeared  in  the 
social  settlements  planted  in  our  various  centres 
of  population,  they  will  be  the  subject  of  our 
examination.  Here  it  may  be  necessary  again 
emphatically  to  protest  against  any  possible  mis- 
interpretation of  one's  motives.  This  examina- 
tion is  made  in  an  honest  belief  that  the  usefulness 
of  such  institutions  may  be  increased,  and  not 
lowered,  by  forcing  a  kindly  and  thorough  dis- 
cussion of  their  aims,  methods,  and  limitations. 
If  any  and  all  discussion  is  regarded  as  an  indi- 
cation of  unfriendliness,  then  such  discussion  is 
all  the  more  necessary  as  a  means  of  breaking 
down  the  barriers  of  a  narrowness  that  is  unwill- 
ing to  bear  any  light.  The  crust  of  habit  in  any 
course  of  action,  especially  if  quasi-religious,  is 
not  always  a  sign  of  perfection.  And,  of  course, 
those  in  our  settlements  who  have  given  the  most 
real  service  to  others  are  the  very  ones  who  are 

90 


SOCIAL  SETTLEMENTS 

most  generous  in  welcoming  suggestions,  and 
most  anxious  for  any  criticism  which  is  construc- 
tive and  not  destructive.  For  no  one  could  pos- 
sibly wish  to  minimize  the  good  and  the  service 
which  some  splendid  characters  like  Samuel 
Barnett  and  Jane  Addams  are  now  doing  for  their 
fellow-men.  Any  way,  their  fame  is  too  securely 
founded  for  any  lesser  persons  to  detract  from  by 
word  or  implication,  even  if  they  wished, — which 
they  do  not. 

n 

At  the  very  outset  the  inquiring  mind  is  obliged 
to  ask  of  the  social  settlements:  What  is  the  ob- 
jective; and  what  are  the  conscious  means  of 
reaching  that  objective?  That  they  wish  to  do 
good  is  to  be  admitted  at  once;  but  that  is  not 
enough.  Intelligent  service  must  have  a  definite 
purpose.  More  than  that,  even  if  the  purpose  is 
clear,  and  all  agree  in  its  desirability,  it  is  of  great 
interest  to  know  by  what  methods  that  purpose 
is  to  be  reached.  Even  if  there  is  agreement  as 
to  the  end,  there  may  be  honest  differences  of 
opinion  as  to  the  wisdom  of  specific  means. 

In  its  origin,  the  settlement  was  the  creation 
of  non-religious  altruism.  In  England,  although 


LATTER-DAY  PROBLEMS 

Toynbee  Hall  was  the  suggestion  of  an  English 
clergyman,  Mr.  Barnett,  the  initial  movement 
came  from  non-clerical  sources.  In  this  country, 
the  social  settlement  undoubtedly  came  forth  be- 
cause many  of  the  churches  were  either  sunk  in 
self-contented  inaction  and  not  doing  the  work  of 
practical  Christianity,  or  because  they  were  unable 
to  satisfy  the  upward  striving  of  the  masses  for 
better  ethical  guidance.  It  is  the  social  settlement 
which  has  stung  the  church  into  action,  not  the 
church  the  social  settlement.  And,  no  doubt,  the 
distinctly  religious  appeal  is  an  obstacle  to  suc- 
cess, especially  where  divers  nationalities  and  be- 
liefs are  crowded  together  in  the  poorer  districts. 
Therefore,  by  way  of  differentiation,  it  cannot  be 
said  that  it  is  the  aim  of  the  settlement  to  teach 
any  particular  religious  creed.  Possibly  the  real 
trouble  with  some  of  the  churches  is  that  they 
have  been  so  long  occupied  with  dialectics  about 
the  devitalized  tenets  of  theology  that  people  have 
reacted  against  all  creeds;  and  the  kindly  dis- 
posed have  gone  off  where  they  can  find  emphasis 
put  upon  the  introduction  into  conduct  of  an 
active  service  to  others.  If  it  be  assumed  that 
religion  is  a  way  of  introducing  into  conduct  a 
code  of  ethics  based  on  service  to  others,  it  may  be 

92 


SOCIAL  SETTLEMENTS 

said  that  the  settlement,  as  an  institution,  has,  to 
a  certain  extent,  superseded  (or  done  the  work  of) 
the  church.  By  divesting  service  to  others  of 
religious  dogma,  it  has  succeeded  in  drawing  into 
altruistic  work  those  who,  by  nature  or  training, 
were  not  likely  to  be  reached  by  the  church  of 
to-day. 

When  we  try  to  express  how  the  aim  of  service 
to  others  is  to  be  carried  out  in  the  settlement  we 
touch  the  crux  of  the  whole  matter.  Toynbee 
Hall  was  founded,  said  Barnett,  to  carry  a  message 
to  the  poor  expressed  in  the  life  of  brother  men. 
That  is,  if  new  ideals,  or  new  principles  of  ethics, 
were  to  be  implanted  in  those  who  had  wrong 
ideals,  or  none  at  all,  they  must  be  enacted  in  the 
lives  of  those  who  come  to  live  in  the  settlement. 
Edward  Denison  said  as  early  as  1867:  "Those 
who  would  teach  must  live  among  those  who  are 
to  be  taught," — which,  after  all,  was  the  rule  of 
Loyola  for  the  Jesuits,  and  it  is  undeniably  true. 
It  may  be  said,  in  passing,  it  is  the  reason  why 
the  economic  education  of  the  Mississippi  Valley 
cannot  be  carried  on  from  New  England  or  the 
Atlantic  seaboard.  In  short,  the  distinctive  ad- 
vance on  the  methods  of  some  churches  consisted 
in  the  practical  means  of  bringing  into  contact  at 

93 


LATTER-DAY  PROBLEMS 

the  social  settlement  different  classes  of  society 
who  possessed  different  social  and  ethical  stand- 
ards, but  who  were  at  present  so  disassociated  in 
work,  residence,  and  education  that  they  were 
growing  apart.  This  separation  of  interests,  al- 
though due  to  increasing  population,  enlarged 
production,  the  growth  of  our  cities,  accumula- 
tion of  wealth,  and  other  such  forces,  was  never- 
theless the  cause  of  suspicion,  envy,  and  hatred, 
and  contained  in  it  the  possibilities  of  permanent 
class  consciousness  based  on  the  unfortunate  belief 
that  the  interests  of  the  classes  were  divergent. 
Anything  which  would  bring  about  a  better  un- 
derstanding between  the  rich  and  the  poor  would 
be  of  advantage  to  both:  the  rich,  or  the  employ- 
ing classes,  could  be  brought  to  see  the  point  of 
view  of  the  poor,  or  the  working  class,  and  thus 
be  enabled  to  know  why  they  did  what  to  them 
seemed  foolish,  or  inexplicable  things;  and  the 
poor  could  be  made  to  see  that  the  rich  were  not 
always  revelling  in  operas,  balls,  and  tables  of 
Levi,  but  that  many  of  them  were  human  beings, 
who  also  wished  to  help  others  wherever  a  sane 
and  practicable  method  were  shown  to  them;  and 
that  altruism  had  also  inspired  the  fortunate  to 
work  for  the  help  of  the  unfortunate. 

94 


SOCIAL  SETTLEMENTS 

in 

The  aims  and  methods  of  social  settlements 
are  both  easy  and  difficult  to  state;  and  the 
reason  for  this  delphic  statement  is  not  far  to 
seek.  The  poverty  and  the  misery  of  many,  the 
existence  of  wrongs  in  industrial  and  municipal 
life,  the  hostile  strife  between  laborers  and  em- 
ployers, and  the  existence  of  vicious  practices  due 
to  a  low  moral  sense,  have  set  remedial  forces  into 
action.  The  settlement  represents  a  part  of  the 
crusade  for  industrial,  civic,  and  moral  improve- 
ment; while  the  movement  also  involves  the  very 
essentials  of  the  whole  problem  of  abolishing  pov- 
erty. It  is  easy,  therefore,  to  say  truly  that  the 
settlement  aims  to  advance  every  agency  which 
will  work  for  righteousness.  On  the  other  hand, 
the  aims  must  be  more  definite  than  this,  and  in 
addition,  definite  methods  ought  to  be  worked  out 
to  accomplish  the  practical  ends;  still,  it  is  diffi- 
cult to  express  with  great  exactitude  the  precise 
policy  of  the  settlement,  and,  a  fortiori,  the  pre- 
cise methods  to  be  followed  out.  In  fact,  almost 
all  the  leaders  in  settlement  work  agree  in  stating 
that  they  have  no  definite  policy,  and  they  also 
mention  the  diversity  of  problems  in  different 

95 


LATTER-DAY  PROBLEMS 

neighborhoods,  and  the  necessity  of  first  learning 
the  peculiarities  of  their  constituency  before  fixing 
on  any  definite  policy.  Yet,  while  the  particular 
work  of  each  settlement  may  differ  from  that  of 
another,  there  are  certain  general  aims  common 
to  all,  which  may  be  regarded  as  characteristic 
of  what  is  now  sometimes  called  a  "movement." 
The  whole  big  problem  attacked  is  that  of  mak- 
ing the  world  better.  How  the  church  has  pro- 
posed to  do  this  we  all  know;  and  we  know  the 
measure  of  its  success.  The  settlement,  however, 
has  a  fairly  definite  and  local  programme.  It 
hunts  out  the  spots  in  our  cities  where  there  is  the 
least  knowledge,  the  worst  conditions,  and  the 
greatest  lack  of  ameliorating  forces,  in  order  to 
introduce  the  practical  means  of  raising  the  ma- 
terial and  moral  standard  of  those  living  there. 
And  yet  it  must  act  under  the  guidance  of  some 
general  principles.  Its  purpose  is  wide — almost 
despairingly  wide.  On  its  economic  side,  it  must 
face  practically  the  whole  problem  we  discussed 
in  "The  Abolition  of  Poverty."  l  But  it  includes 
more  than  this :  it  aims  to  cover  also  the  elevation 
of  the  moral  and  civic  standards  of  its  constitu- 
ency. This  is  the  reason  why  the  residents  are 

1  Chapter  IIL 


SOCIAL  SETTLEMENTS 

sometimes  surprised  to  find  that  the  paving  of  an 
alley  is  tied  up  with  the  civil  service  reform  of  the 
city;  or  that  the  control  of  the  "white  slave" 
traffic  in  their  own  bailiwick  is  also  a  matter  of 
national  concern.  They  are  really  concerned  with 
principles  and  problems  of  general  import,  involv- 
ing many  fields  of  inquiry,  political,  economic, 
and  moral.  To  improve  the  race  is  a  staggering 
task,  but  idealists  do  not  shrink  from  any  task. 
One,  therefore,  watches  and  inquires  for  their 
policy  in  this  great  undertaking  with  a  fascinated 
interest  like  that  with  which  one  might  in  person 
follow  an  army  as  it  goes  into  action. 

What  is  the  strategy,  and  what  is  the  tactics  of 
this  settlement  army  ?  What  is  the  plan  of  opera- 
tions, and  how  is  the  plan  to  be  carried  out  ?  The 
purpose  is  to  overcome  evil  and  to  advance 
schemes  for  the  progress  of  society  in  industrial, 
civic,  and  moral  ways.  Here  we  are  met  with  a 
difficulty  at  the  start, — one  which  results  from 
the  fact  that  the  settlement  army  is  a  citizen  or 
volunteer  force:  there  is  no  organized  strategy. 
Here  and  there  are  some  conspicuously  fit  offi- 
cers, and  here  and  there  are  some  obviously 
unfit  ones.  From  the  fit  ones,  we  get  the  best 
idea  of  the  plan  so  far  as  it  has  been  evolved. 

97 


LATTER-DAY  PROBLEMS 

At  the  start,  they  will  tell  you,  they  think  the 
strategy  can  be  worked  out  only  by  experience 
in  the  field;  that  they  have  very  little  use  for 
economic  West  Points;  that  science  has  very 
little  help  to  give.  This  view  seems  to  apply 
not  only  to  the  discovery  of  the  ultimate  pur- 
pose, but  to  the  practical  methods  to  be  fol- 
lowed. Such  an  attitude  is  much  the  same — 
to  change  the  illustration — as  if  medical  progress 
should  be  expected  to  come  more  effectually 
from  physicians  engaged  in  actual  practice  than 
from  the  scientific  laboratories  of  Pasteur  or 
Erlich.  In  fact,  the  discovery  of  a  principle 
may — and  has — changed  the  whole  character  of 
therapeutics.  If  the  cause  of  a  disease  were  dis- 
covered in  a  new  microbe,  then  the  methods  of 
prevention  of  that  disease  would  be  radically 
changed  from  the  former  treatment. 

We  may  speak  similarly  of  the  great  central 
economic  problems  which  confront  the  resident 
of  a  settlement.  Of  these  the  chief  one  is  to  find 
the  principle  to  be  followed  if  we  should  hope  to 
raise  the  material  comfort  of  the  poorest  paid 
wage-receivers.  Poverty,  like  disease,  is  what  we 
hope  to  remove.  Is  this  end  to  be  reached  only 
by  the  work  of  residents  in  the  practical  experi- 


SOCIAL  SETTLEMENTS 

ence  of  settlement  life,  or  by  the  study  of  trained 
economic  investigators — or  by  both  allied?  It  is 
obvious,  of  course,  that  settlements  are  not  the 
only  places  in  which  students  of  economics  may 
come  into  intimate  relationship  with  the  condi- 
tions of  the  very  poor.  Many  persons  who  have 
never  seen  a  settlement  may  yet  be  thoroughly  in- 
formed of,  and  closely  in  sympathy  with,  the 
struggle  of  the  lowly  for  a  better  existence.  Of 
course,  it  is  actual  experience,  no  matter  whether 
it  is  within  or  without  a  settlement,  which  is  to  be 
regarded  as  the  necessary  condition  of  a  correct 
prescription  for  the  economic  ills  of  society.  But, 
even  on  this  wider  ground,  may  it  not  be  asked 
whether  experience  is  the  sole  requisite  for  a  true 
insight  into  the  problem  of  correcting  these  ills? 
Immediately,  we  are  obliged  to  inquire  as  to  the 
qualities  of  mind  and  heart  which  are  needed  in 
such  a  search.  In  making  an  economic  analysis 
of  stated  facts,  and  in  rightly  arriving  at  causes,  it 
is  patent  that  a  thorough  economic  training  is  of 
the  first  importance.  No  one  in  his  senses  would 
think  of  allowing  an  untrained  layman  to  deter- 
mine whether  the  high  temperature  of  a  sick 
patient  were  due  to  typhoid  fever  or  to  appendi- 
citis. And  when  the  settlement  resident  is  re- 

99 


LATTER-DAY  PROBLEMS 

quired  to  pass  judgment  upon,  or  to  take  a  per- 
sonal share  in,  an  economic  dispute,  it  is  quite 
possible  that  an  error  may  be  committed,  unless 
the  person  is  competent  to  think  accurately  in  the 
subject  and  to  grasp  all  the  elements  of  the  prob- 
lem. To  follow  the  immediate  promptings  of  the 
heart  may  result  in  more  ill  than  good — and  only 
too  late  bring  the  conviction  that  after  long  years 
of  service  no  real  progress  has  been  made  in  solv- 
ing the  difficulty.  Mitigating  present  suffering — 
or  social  nursing — is  essential  to  any  bad  situa- 
tion ;  but  it  is  a  larger  and  better  task  to  work  out 
the  preventive  principle  lying  behind  the  facts  of 
suffering.  And  yet,  how  can  the  investigator  pos- 
sibly make  any  penetrating  study  of  causes  at 
work  in  a  bad  economic  situation  unless  he  can 
get  into  close  touch  with  all  the  facts  ?  There  are 
economists  who  spin  their  theories  in  the  closet, 
and  whose  symmetrical,  metaphysical  systems 
satisfy  all  the  demands  of  an  analytical  mind, 
except  to  explain  the  actual  facts  of  life.  On  the 
other  hand,  there  are  those  who  know  only  facts, 
and  who  have  no  power  to  classify  or  organize 
them,  or  to  discover  causes  at  work.  The  truth 
can  never  be  reached  by  either  class  of  these  ex- 
tremists. The  principles  needed  to  guide  us  in 

100 


SOCIAL  SETTLEMENTS 

the  complexities  of  daily  life  can  be  obtained  only 
by  those  competent  to  discover  causes  and  who 
are  also  in  a  position  to  get  all  the  results  of  ex- 
perience. To  stake  all  on  experience  is,  therefore, 
to  ignore  half  of  the  process.  This  is  the  old  dis- 
pute as  to  the  possibility  of  arriving  at  economic 
truth  solely  by  induction, — a  method  which  no 
longer  receives  much  support. 

Social  settlements  are,  of  course,  not  labora- 
tories where  the  hypotheses  of  cold-blooded  theo- 
rists are  to  be  tried  out  experimentally  at  the  ex- 
pense of  human  victims;  far  from  it.  But -they 
should  be  places  where  principles  of  economics, 
carefully  ascertained  by  sound  method,  should  be 
relied  on  and  applied  in  actual  conditions  as  they 
arise.  That  is,  the  settlement  needs  the  results 
of  economics  as  much  as  medicine  needs  the  re- 
sults of  the  scientific  laboratories.  It  is  wrong  to 
put  the  case  as  in  the  following  words:  "The 
settlement  stands  for  application  as  opposed  to 
research;  for  emotion  as  opposed  to  abstraction; 
for  universal  interest  as  opposed  to  specialization." 
There  can  be  no  safe  basis  for  application  and 
emotion  without  previous  research  and  study  of 
causes.  It  was  Arnold  Toynbee  himself  who  said 
"that  thought  and  knowledge  must  now  in  phi- 

101 


LATTER-DAY  PROBLEMS 

lanthropy  take  the  place  of  feeling" ;  and  also  that 
"if  we  cannot  live  by  bread  alone  neither  can  we 
subsist  solely  on  nectar  and  ambrosia."  * 

IV 

What,  then,  as  to  the  qualifications  of  the  usual 
settlement  resident  for  such  serious  work  as  deter- 
mining on  the  objective  to  be  followed?  Let  me 
disclaim  the  slightest  intention  of  depreciating  or 
of  even  speaking  in  a  possibly  patronizing  way 
of  zeal.  It  is  a  necessary  part  of  an  altruistic  ser- 
vice, and  it  deserves  our  respectful  admiration. 
But  zeal  alone  is,  as  every  one  knows,  not  enough 
for  this  social  duty.  Beyond  it  and  the  possession 
of  tact,  sympathy  and  moral  earnestness,  the  set- 
tlement guide  should  be  entirely  competent  to  act 
as  teacher  and  judge  in  the  complicated  economic 
questions  which  underlie  the  problem  of  improv- 
ing the  condition  of  the  very  poor;  or,  if  untrained, 
such  person  should  have  the  discretion  to  avoid 
becoming  a  partisan  and  assuming  the  whole 
matter  in  question  as  settled  by  those  only  who 
happen  to  be  nearest  and  most  emphatic  as  to 
facts  alone.  Not  infrequently  the  ranks  of  settle- 

*F.  C.  Montague,  "Johns  Hopkins  Univ.  Studies,"  vii,  pp. 
a6,  28. 

102 


SOCIAL  SETTLEMENTS 

ment  residents  are  filled  with  women  who  go  to 
the  settlement,  as  women  in  the  middle  ages  went 
to  the  cloister.  Besides  willingness,  there  is  often 
little  to  recommend  them  as  fitted  for  the  impor- 
tant tasks  before  them,  and  for  which  a  rigorous 
professional  training  should  be  exacted.  Indeed, 
the  practical  question  has  already  been  raised,  at 
least  in  one  university,  of  forming  a  special  course 
of  study  designed  to  prepare  persons  of  ability, 
having  an  altruistic  ambition,  for  a  career  in  prac- 
tical philanthropy.  Certainly,  the  day  of  untrained 
persons  in  social  nursing  ought  to  have  gone  by  as 
entirely  as  it  has  in  medical  nursing. 

All  that  has  been  said  may  have  been  regarded 
as  applying  only  to  subordinate  helpers,  and  not 
to  those  in  authority;  but  it  should  also  apply 
more  strongly  to  those  in  a  position  to  determine 
the  general  policy  of  a  settlement.  As  we  look 
over  the  field,  do  we  conclude  that  the  directors 
of  the  settlements  are  those  who  have  first 
shown  their  pre-eminence  by  ability,  training, 
and  approved  capacity  to  settle  serious  economic 
problems  ?  Nor  does  one  mean  by  this  to  exact 
agreement  with  any  obsolete  economics,  or  any 
preconceived  point  of  view,  but  the  ability  to  think 
in  the  subject  rationally  and  to  have  intellectual 

103 


LATTER-DAY  PROBLEMS 

grasp  on  serious  economic  topics.  Is  it  right,  or 
even  expedient,  to  give  the  entire  direction  of  the 
policy  of  a  settlement  to  a  person,  no  matter  how 
good  and  amiable,  who  has  had  no  thorough  train- 
ing in  economic  and  civic  studies — to  say  nothing 
of  hygiene  and  law?  The  head  of  a  settlement 
often  is,  but  should  not  be,  a  preacher  of  special 
tenets.  To  an  individual  that  may  be  allowed, 
but  not  to  a  director  of  an  institution  representing 
the  joint  activities  of  those  coming  from  poor  and 
rich  alike.  A  preacher  of  duty,  of  service  to  others, 
every  worker  must  be.  But  personal  vanity  and 
cock-sureness  should  be  sunk  in  public  duty;  and 
policies  should  be  determined  upon  only  after  care- 
ful discussion  by  judicial  persons  who  are  inter- 
ested in  narrowing,  rather  than  in  widening,  the 
gap  between  social  classes.  One  of  the  reasons  for 
the  lessening  influence  of  the  church  is  the  poor 
quality  of  some  of  the  clergy;  and  if  the  workers 
in  the  settlements  show  lack  of  training  and  abil- 
ity, their  institutions  also  will  surely  lose  prestige. 

v 

Keeping  in  mind  the  desire  of  the  settlement  to 
bring  about  a  higher  level  of  satisfactions  for  the 
workingmen,  at  least  one  industrial  objective  is 

104 


SOCIAL  SETTLEMENTS 

to  assist  in  securing  "a  living  wage."  What  has 
the  method  based  on  experience  brought  forward 
to  accomplish  this  end?  Of  course,  the  same 
policies  are  not  followed  in  all  settlements,  since 
the  individual  views  of  the  person  who  dominates 
the  institution  are  usually  reflected  in  the  special 
forms  of  activity;  but  the  attitude  toward  wages 
and  the  unions  is  more  or  less  the  same  in  many 
settlements.  Perhaps  the  common  form  of  in- 
terest is  in  the  struggle  of  the  poor  to  better  their 
material  condition.  Obviously  this  is  to  be  ac- 
complished through  higher  wages.  Then,  what 
methods  have  the  most  intelligent  leaders  in  the 
settlement  movement  suggested  for  this  purpose? 
Although  no  two  persons  would  state  the  method 
alike,  yet  there  is  a  prevailing  attitude  character- 
istic of  the  current  thinking  in  and  about  settle- 
ments— and  that  is  the  recourse  to  legislation. 
Just  as  the  labor  element  try  to  force  an  eight-hour 
day  by  legislation,  so  throughout  the  settlements 
one  hears  often  the  wish  to  establish  a  minimum 
wage  by  legislation.  Recourse  to  law  to  change 
industrial  conditions  is  evidently  popular.  Apropos 
of  the  anthracite  strike,  if  peace  had  been  main- 
tained, it  was  suggested  that  public  sympathy 
would  have  urged  legislation  on  the  minimum 

105 


LATTER-DAY  PROBLEMS 

wage,  after  the  manner  of  New  Zealand.  Here 
we  have  an  example  of  the  results  following  from 
the  methods  arrived  at  by  experience. 

It  is  precisely  in  such  a  case  that  the  method 
by  experience  needs  correction  by  science  and  a 
wider  knowledge  of  principle.  Time  and  again 
economics  has  shown  that  legislation  is  futile,  if 
not  in  accordance  with  the  economic  laws  of  the 
market.  Nor  does  one  have  to  go  far  afield  to 
discover  that,  if  wages  have  fallen  below  a  living 
rate,  it  is  not  merely  a  question  of  demand;  it  is 
also  a  question  of  supply.  If  the  supply  of  un- 
skilled labor  is  so  abundant  at  a  particular  point 
of  competition  in  a  city  district  that  pitiable  con- 
ditions result,  it  is  no  remedy  to  legislate  as  to 
what  wages  ought  to  be.  Laws  fixing  the  prices 
of  goods  or  of  labor  are  now  regarded  as  the  evi- 
dence of  a  mediaeval  mind.  If  wages  are  too  low, 
they  can  be  raised  either  (i)  by  reducing  the  sup- 
ply of  competitors,  or  (2)  by  increasing  the  de- 
mand for  labor.  By  reducing  supply  is  not  meant 
massacre,  but  the  transfer  to  other  points  where 
supply  is  short,  or  the  elevation  of  the  worker  by 
increasing  his  industrial  productivity.  To  fix  a 
legal  minimum  wage  is  merely  to  transfer  to  the 
user  of  labor  the  responsibility  for  the  excess  of 

1 06 


SOCIAL  SETTLEMENTS 

supply  of  labor  over  which  he  has  no  control.  We 
all  wish  that  the  laboring  man  should  have  in- 
creased consumption,  and  no  one  is  cold-blooded 
and  unsympathetic  who  insists  that  this  increased 
consumption  cannot  be  obtained  by  legislation, 
but  by  conformance  to  laws  which  permanently 
regulate  the  price  of  labor.  As  explained  else- 
where,1 increased  consumption  is  a  function  of 
increased  productivity,  or  an  increased  demand 
relatively  to  supply  of  that  particular  kind  of 
labor.  This  view  is  not  the  outcome  of  an  indi- 
vidualistic philosophy  any  more  than  the  law  of 
gravity  is  individualistic.  But  it  is  a  definite  cor- 
rection which  science  can  make  to  any  induction 
from  experience  alone  which  seems  to  rely  on 
legislation  as  a  means  of  securing  results. 

There  is,  however,  an  allied  matter  on  which 
the  settlements  are  clearly  in  the  right,  and  in 
which  they  are  likely  to  be  of  great  service.  One 
way  of  influencing  the  productivity  of  laborers  is 
through  a  modification  of  their  standard  of  living. 
It  is  not  a  hopeless  or  unsympathetic  mind  which 
believes  that  improvement  is  within  the  control  of 
the  laborer  himself;  and  that  permanent  progress 
is  most  likely  to  come  in  this  way  rather  than  by 
1  Chapter  HI,  p. 
107 


LATTER-DAY  PROBLEMS 

external  influences  such  as  legislation.  And  yet 
the  dual  nature  of  the  problem  is  such  that  en- 
vironment as  well  as  internal  change  is  effective. 
The  rise  of  the  standard,  to  be  sure,  is  largely  a 
matter  of  character  and  morals.  Although  its  re- 
sults are  economic,  the  forces  affecting  the  change 
of  standard  are  mainly  un-economic.  Here,  then, 
we  have  a  field  for  the  fullest  activity  of  the  settle- 
ment ;  and  one  of  the  expressed  aims  of  the  settle- 
ment has  been  to  raise  the  standard  of  living.  In 
a  very  important  way,  so  far  as  the  standard  can 
be  touched  by  environment,  legislation  is  a  power- 
ful help;  and  all  ethical  and  idealistic  impulses, 
emotion  and  stimulus  to  the  heart,  have  here  an 
undisputed  place.  It  is  possible  that  the  matter  of 
changing  the  standard  is  the  chief  and  most  useful 
function  of  the  social  settlement.  Indeed,  it  gives 
the  key  to  such  a  plan  as  that  of  Toynbee  Hall. 

No  doubt  many  who  have  passed  out  of  the  sor- 
did byways  of  Whitechapel  into  the  artistic  and 
cultured  atmosphere  of  Toynbee  Hall  have  tried 
to  formulate  the  principle  by  which  the  residents 
influenced  the  life  of  the  neighborhood.  Would 
not  the  injection  of  men  living  a  life  of  culture  and 
comfort  into  a  region  of  poverty  and  misery  only 
aggravate  differences?  Toynbee  himself  hoped 

108 


SOCIAL  SETTLEMENTS 

to  dedicate  his  life  to  the  "social  expression  of 
culture."  Obviously,  the  existence  of  these  cul- 
tivated Oxford  men  in  Whitechapel  does  not 
directly  raise  the  wages,  or  increase  the  consump- 
tion, of  the  poor.  But  their  very  presence  there, 
without  patronizing,  unmistakably  sets  before 
those  who  have  not  had  it  a  sample  of  democratic 
helpfulness  and  fulness  of  life  which  must  help 
in  the  formation  of  a  higher  standard  of  living. 
The  man  who  comes  from  a  damp  basement  tene- 
ment to  the  warm  parlors  and  cheerful  club-rooms 
of  Toynbee  Hall  will  get  a  stimulus  toward  trying 
to  improve  his  own  lot.  More  than  that,  he  will 
get  a  helping  hand  and  intelligent  assistance.  If 
the  spirit  of  improvement  is  introduced,  the  prac- 
tical means  of  carrying  it  out  is  sure  to  be  found 
in  one  way  or  another.  Therefore,  to  the  extent 
that  the  settlement  is  creating  a  new  spirit  of 
progress  and  improvement  it  has  an  unquestioned 
future.  Given  the  purpose  which  is  to  be  put  into 
action,,  the  really  difficult  question  is  as  to  how 
the  purpose  may  be  carried  out.  If  the  concrete 
methods  be  asked  for,  according  to  which  the 
poor  are  to  get  higher  material  rewards,  then  the 
aid  of  economic  training  is  essential.  The  prin- 
ciples by  which  men  progress  up  the  scale  of  wages 

109 


LATTER-DAY  PROBLEMS 

and  comfort  cannot  be  settled  by  emotion  as  op- 
posed to  research. 

It  is,  moreover,  the  function  of  the  settlement 
residents  to  put  principles  to  concrete  tests. 
They,  more  than  most  others,  are  placed  where 
they  must  have  practical  results.  Examples  of 
effective  work  by  the  settlement  are  found  in  the 
enforcement  of  sanitary  and  smoke  ordinances, 
in  meat  inspection,  in  laws  to  secure  proper  fire 
escapes  in  factories,  and  to  obtain  protection  to 
workmen  from  dangerous  machinery.  Metaphys- 
ical abstractions  are  useless;  principles  must 
be  translated  into  rules  of  action  for  every-day 
life.  The  mechanic  in  the  shop  comes  to  know 
whether  a  tool  does  its  work  well  or  not;  yet 
he  may  not  know  the  principles  of  the  science 
of  thermodynamics  or  electricity  by  which  his  tool 
was  constructed.  So,  very  often  a  settlement 
worker  may  accomplish  good  results  under  good 
principles,  without  knowing  much  as  to  the  con- 
structive processes  by  which  the  principles  were 
arrived  at.  Although  some  mechanics  are  in- 
ventors, few  could  have  devised  the  machine  they 
work  with;  and,  likewise,  while  some  residents 
may  have  capacity  and  training  to  work  out  a 
constructive  policy,  the  most  of  them  must  accept 

no 


SOCIAL  SETTLEMENTS 

the  r61e  of  following  the  rules  laid  down  by  their 
leaders.  In  the  main,  to  bring  into  contact  ele- 
ments which  are  of  mutual  benefit,  and  to  mediate 
between  alienated  classes,  so  that  common  bonds  of 
interest  and  feeling  are  established,  are  important 
things  for  the  content  of  any  community.  The  aim 
is  right,  even  if  errors  are  made  in  carrying  it  out. 
Even  though  the  settlement  wishes  to  bring 
about  larger  material  rewards  for  the  poor,  and 
even  though  it  aims  especially  at  raising  the 
standard  of  living,  it  consciously  plans  to  do  more. 
Civic  and  moral  ends  are  always  in  its  programme. 
As  a  result  of  seeing  much  of  those  who  are  least 
happy  and  comfortable,  the  resident  gets  no  ex- 
alted idea  of  the  existing  industrial  organization. 
Consequently,  a  reaction  in  favor  of  a  better  in- 
dustrial system  is  likely.  The  present  form  of 
society,  tried  under  conditions  due  to  the  imperfec- 
tion of  mankind,  is  almost  certain  to  be  contrasted 
with  another  form  of  society  conceived  under  ideal 
conditions  such  as  would  follow  a  perfected  human 
nature.  Hence,  there  is  in  the  settlement  a  not 
infrequent  sympathy  with  socialism.  If  settle- 
ment residents  are  not  avowed  socialists,  yet 
avowed  socialists  always  find  a  congenial  atmos- 
phere in  the  settlement. 

in 


LATTER-DAY  PROBLEMS 

Most  of  our  settlements  are  placed  where  they 
must  deal  with  masses  of  newly  arrived  immi- 
grants. Indeed,  the  questions  centring  about 
immigration,  their  care  on  arrival,  the  protection 
of  women,  the  duty  of  giving  them  intelligent  civic 
instruction,  and  the  like,  are  constantly  empha- 
sized by  those  in  direction  of  settlements.  Perhaps 
one  of  the  most  praiseworthy  qualities  in  a  settle- 
ment worker  is  that  of  sympathy,  and  the  ability 
to  show  a  stranger  that  his  point  of  view  is  under- 
stood. In  thus  opening  the  mind  to  what  is  pass- 
ing in  the  foreigner's  thoughts  and  feelings  the 
settlement  worker  comes  into  close  contact  with 
all  the  forms  of  antagonism  to  government  of  the 
autocratic  kind  now  existing  in  the  countries  of 
the  immigrants'  nativity.  Obviously  the  most 
pronounced  type  of  that  antagonism — especially 
when  it  cannot  be  continued  against  our  free  in- 
stitutions as  it  was  against  European  absolutism 
— takes  the  form  of  socialism.  The  newcomers, 
fresh  from  the  activity  of  foreign  agitation,  are  full 
of  socialistic  doctrines  especially  of  the  meta- 
physical sort.  The  settlement  resident  may  listen 
sympathetically  to  the  eloquent  analysis  of  the 
wrongs  of  capitalism,  hear  difficult  economic 
propositions  glibly  discussed  and  disposed  of, 

112 


SOCIAL  SETTLEMENTS 

hospitably  encourage  full  and  free  discussion,  and 
give  rooms  for  the  meeting  of  any  and  all  kinds  of 
thinking,  whether  socialistic  or  anarchistic.  There 
can  be  no  real  dissent  from  the  wisdom  of  this 
method;  for  free  discussion  is  doubtless  the  best 
preventive  of  radical  error.  But  how  as  to  the 
original  purpose  to  bring  about  a  better  under- 
standing between  different  classes  of  society?  Is 
this  to  be  accomplished  by  hearing  and  sympa- 
thizing with  only  one  class  in  society?  Does  free 
discussion  mean  the  presentation  of  only  one  side 
of  a  difficult  question  ?  When  the  radical  socialists 
newly  arrived  are  warmly  welcomed  in  the  rooms 
of  the  settlements,  do  they  hear  anything  of  the 
errors  of  Marx  or  of  the  impossibilities  of  social- 
ism? If  the  settlement  allows  itself  to  think 
only  in  terms  of  one  class,  and  in  antagonism  not 
only  to  another  class  but  to  all  organized  society, 
as  established  by  the  long  experience  of  the  race, 
then  it  is  certainly  not  creating  but  preventing  a 
better  understanding  between  different  parts  of 
society.  Such  a  situation,  of  course,  is  not  to  be 
found  in  all  settlements.  Whatever  this  tendency 
to  socialism  may  have  been  in  the  past,  it  is  quite 
evident  it  is  very  much  less  active  in  settlements 
at  the  present  time. 


LATTER-DAY  PROBLEMS 

VI 

Since  raising  the  standards  of  living  is  a  slow 
process,  it  would  be  natural  to  expect  that  atten- 
tion should  be  directed  to  improving  the  quality  of 
neighborhood  life.  Perhaps  this  is  what  the  resi- 
dent has  in  mind  in  speaking  of  wishing  to  give  to 
the  hard  worker  more  life.  In  trying  to  ascertain 
the  purpose  of  social  settlements,  we  find  the  fol- 
lowing interesting  statement  from  Jane  Addams:  * 

"The  residents  are  actuated,  not  by  a  vague 
desire  to  do  good  which  may  distinguish  the  phi- 
lanthropist, nor  by  that  thirst  for  data  and  analysis 
of  the  situation  which  so  often  distinguishes  the 
1  sociologist,'  but  by  the  more  intimate  and  human 
desire  that  the  working  man,  quite  aside  from  the 
question  of  the  unemployed  or  the  minimum  wage, 
shall  have  secured  to  him  powers  of  life  and  en- 
joyment, after  he  has  painstakingly  earned  his 
subsistence;  that  he  shall  have  an  opportunity  to 
develop  those  higher  moral  and  intellectual  quali- 
ties upon  which  depend  the  free  aspects  and  values 
of  living.  Thus  a  settlement  finds  itself  more  and 
more  working  toward  legal  enactment,  not  only 
on  behalf  of  working  people,  and  not  only  in  co- 

1  "Annals  of  the  American  Academy,"  May,  1899,  p.  50. 
114 


SOCIAL  SETTLEMENTS 

operation  with  them,  but  with  every  member  of 
the  community  who  is  susceptible  to  the  moral 
appeal." 

In  similar  vein,  it  is  declared  that  it  is  the  aim 
of  the  settlement  to  express  the  meaning  of  "life" 
in  forms  of  activity;  and  we  also  meet  the  idea 
that  what  men  want  is  "life  and  not  theories  about 
life." 

It  is  obvious  that  we  should  know  what  is  meant 
by  "life."  That  is,  what  moral  ideas  are  con- 
veyed by  this  expression?  Such  an  object  is 
clearly  ethical ;  and  the  ethical  code  is  briefly  con- 
tained in  the  word  righteousness.  Whose  con- 
ception of  life,  and  whose  idea  of  right  and  wrong 
are  to  be  expressed  ?  In  actual  fact,  of  course,  it  is 
the  conception  of  the  one  individual  who  has  the 
force  to  lead  in  any  given  situation.  Grant  that 
we  wish  to  secure  for  the  workmen  powers  of  en- 
joyment and  the  opportunity  to  develop  higher 
moral  and  intellectual  qualities,  by  what  definite 
steps  can  these  things  be  gained?  Again,  it  is 
hinted  that  the  effective  means  is  legislation.  Cer- 
tainly many  things  in  a  bad  environment  can  be 
bettered  by  legislation;  but,  on  the  other  hand, 
the  weaknesses  of  heredity  cannot  be  thus  re- 
moved. In  fact,  the  problem  of  abolishing  wrong 

"5 


LATTER-DAY  PROBLEMS 

is  beyond  the  powers  of  legislation,  and  can  be 
fundamentally  touched  only  by  work  which  will 
change  the  ideals  and  character  of  specific  per- 
sons. It  is  a  moral,  not  a  legislative  process;  it 
must  work  from  within  and  not  from  without. 
The  prevalence  of  the  policy  of  resort  to  legislation 
as  a  cure  for  industrial  evils  is  characteristic  of  the 
day,  if  it  is  not  also  characteristic  of  the  settlement. 
More  than  this,  it  is  said  that  the  group  of 
toilers  have  in  many  respects  a  different  ethical 
code  from  that  of  the  well-to-do.  The  former  are 
readier  with  their  sympathy  and  less  selfish  and 
more  generous  than  the  latter.  The  cautious  and 
reserved  policy  of  a  well-fed,  well-educated  charity 
visitor  as  against  the  quick  responsiveness  of  the 
poor  is,  perhaps,  evidence  of  the  emphasis  on  fore- 
sight which  partly  accounts  for  the  present  differ- 
ence in  the  relative  conditions  of  each.  The 
fable  of  the  ant  and  grasshopper  is  old.  But, 
further  than  this,  the  two  groups  are  said  to  differ 
in  their  ethical  attitude  on  primary  questions. 
Yet,  in  the  main,  one  very  much  doubts  if  the  two 
groups,  such  as  the  employers  and  employees,  can 
be  separately  classified  on  the  basis  of  a  different 
code  of  ethics.  The  laborer  is  set  on  gaining  his 
end  in  the  struggle  for  higher  wages;  so  is  the 

116 


SOCIAL  SETTLEMENTS 

employer  in  holding  his  own  for  the  accumulation 
of  wealth.  Both  are  actuated  by  selfish  motives, 
and  many  in  both  classes  are  apt  to  depart  from 
what  is  right.  There  is  no  monopoly  of  right  and 
justice  on  either  side.  One  man  sins  in  disre- 
garding his  duty  to  his  operatives,  the  other  in 
his  duty  to  his  employer;  one  keeps  his  men  for 
long  hours  in  unsanitary  rooms,  the  other  will 
make  work  and  throw  biting  acid  on  his  enemy's 
horse.  As  soon  as  a  workman  comes  up  from  the 
ranks  and  becomes  a  successful  boss  over  others, 
he  shows  the  same  disposition  to  bully  and  take 
advantage  of  his  laborers  which  he  so  resented 
when  he  was  the  under  dog.  The  moral  regenera- 
tion needed  should  reach  both  those  above  and 
those  below.  The  moral  line  cannot  be  drawn 
between  the  employer  and  the  employed. 

Back  of  all  the  ethical  differences  is,  undoubt- 
edly, the  feeling  that  the  worker  is  not  receiving 
his  just  distributive  share.  Hence  he  may  regard 
as  justifiable  what  to  others  is  hitting  below  the 
belt,  because  in  a  limited  knowledge  of  the  world 
it  seems  essential  to  the  success  of  his  purpose. 
This  case  discloses  clearly  the  true  relations  of 
economics  to  ethics,  of  research  to  emotion.  It 
is  not  possible  to  say  what  is  right  or  wrong  until 

117 


LATTER-DAY  PROBLEMS 

the  causes  and  effects  are  known ;  and  a  scientific 
analysis  is  as  necessary  to  a  basis  of  ethical  judg- 
ment as  is  the  cause  of  death  to  the  verdict  of  a 
coroner's  jury.  If  light-minded  persons,  incapable 
of  serious  economic  analysis,  get  a  wrong,  or  very 
superficial,  notion  as  to  the  causes  producing  a 
pitifully  low  rate  of  wages  in  certain  instances, 
they  may  apply  emotion,  or  legislative  correction, 
in  a  way  to  cause  great  damage.  The  widest  and 
deepest  insight  into  economic  distribution  is  a 
condition  precedent  of  any  correct  moral  judg- 
ment, or  of  a  programme  of  social  reform. 

It  is  a  matter  greatly  to  be  deplored,  if  philan- 
thropic zeal  be  stirred  up  and  applied  in  such  ways 
that  after  decades  of  effort  it  is  reluctantly  to  be 
admitted  that  no  progress  has  been  made,  and  that 
the  same  old  conditions  exist  only  for  more  people 
than  before.  Unless  there  is  a  cordial  and  mutu- 
ally respectful  relation  between  economic  science 
and  social  reform,  there  is  not  likely  to  be  much 
permanent  good  accomplished.  Yet,  even  if  such 
a  relation  cannot  be  established,  the  settlement 
will  still  have  certain  fields  to  work  in  which  are 
certain  to  yield  good  fruit.  In  municipal  and 
social  reforms,  such  as  quickening  public  opinion, 
developing  neighborly  kindness  and  sociability, 

118 


SOCIAL  SETTLEMENTS 

lightening  drudgery  by  recreation,  and  aiding  in 
the  work  of  organized  charity,  the  settlement  has 
a  large  and  important  work.  But  in  industrial 
questions,  except  so  far  as  it  gives  industrial  and 
manual  training — which  can  be  carried  out  in  a 
comprehensive  way  only  by  the  public  itself  in  its 
corporate  capacity — the  settlement  cannot  hope 
to  do  much  to  raise  the  actual  level  of  wages  and 
comfort.  By  raising  the  standard  of  living  in 
spots,  to  be  sure,  some  indirect  influence  may  be 
exercised  on  the  rate  of  wages.  It  is  in  its  power, 
however,  to  do  a  higher  thing:  it  can  continue  its 
efforts  to  touch  the  conscience  of  the  community 
and  to  create  among  the  lowly  a  sense  of  the 
brotherhood  of  all  men.  Much  may  be  done  to 
establish  democratic  relations  between  all  our 
classes;  but  industrial  democracy  can  come  about 
only  when  there  is  a  generally  diffused  knowledge 
of  the  true  principles  affecting  the  incomes  of  so- 
ciety, so  that  a  comprehending  public  will  accept 
what  is  justified  by  intelligence,  and  so  that  some 
will  not  war  against  others  on  the  basis  of  preju- 
dice and  ignorance. 


CHAPTER  V 
POLITICAL  ECONOMY  AND  CHRISTIANITY 


SCIENTIFIC  results  can  be  tested  in  no  way 
so  thoroughly  as  by  an  attempt  to  harmonize 
them  with  the  truth  gained  in  other  fields.  There 
can  be  no  dissonance  between  different  portions 
of  truth;  therefore,  when  the  economist  touches 
the  instrument  of  truth,  the  sounds  which  he 
evokes — if  he  be  a  true  performer — ought  to  blend 
together  harmoniously.  If  his  notes  produce  dis- 
cords, the  fault  is  with  him;  not  with  the  instru- 
ment. If  the  fundamental  principles  of  Political 
Economy  are  not  in  harmony  with  Christian  truth, 
it  is  more  than  likely  that  the  economist  is  wrong. 
Our  distinguished  botanist,  the  late  Asa  Gray, 
once  said  that  it  would  be  a  good  thing  sometimes 
to  have  a  sermon  addressed  from  the  pews  to  the 
pulpit.  If  such  a  sermon  would  give  the  ministry 
a  better  understanding  of  economic  principles  it 
would  be  a  protection  against  much  illogical  and 

1 20 


POLITICAL  ECONOMY  AND  CHRISTIANITY 

emotional  talk  on  economics  from  the  pulpit. 
But,  on  the  other  hand,  it  is  quite  as  important 
that  economists  should  consider  the  relations  of 
their  teaching  to  Christianity.  By  taking  their 
nuggets  to  the  assay  they  may  learn  how  much 
they  have  discovered. 

This,  however,  need  not  require  us  to  sympa- 
thize with  the  crude,  sentimental  writing  which 
chatters  about  the  inhuman,  cruel,  and  soulless 
character  of  Political  Economy.  If  this  study  ex- 
plains the  conditions  under  which  men  supply 
their  economic  wants  in  this  world,  then  it  is  no 
more,  no  less,  cruel  than  other  studies,  like  phys- 
ics and  chemistry,  which  explain  other  relations 
in  which  we  stand  to  the  material  world  around 
us.  To  know  these  conditions  does  not  relieve  us 
from  moral  responsibility  as  to  our  actions.  It  is 
not  a  cruel  thing,  for  instance,  to  explain  that  the 
velocity  of  falling  bodies  under  the  law  of  gravita- 
tion will  cause  the  death  of  a  child  that  falls  from 
a  fifth-story  window ;  but  it  would  be  inhuman  to 
coax  a  child  to  do  it,  or  to  let  it  fall  without  trying 
to  prevent  its  unconscious  action.  So,  likewise,  it 
is  not  an  inhuman  thing  to  explain  that  an  over- 
crowding of  numbers  will  result  in  want  and 
misery.  The  inhumanity  exists  in  the  act  which 

121 


LATTER-DAY  PROBLEMS 

causes  want  and  misery.  If  Political  Economy 
points  out  the  connections  between  cause  and 
effect  in  our  economic  conditions,  so  that  the  com- 
munity is  thereby  enabled  to  know  how  to  pre- 
vent want  and  misery,  it  becomes  the  forerunner  of 
practical  ethics.  By  laying  bare  the  causes  of 
things,  it  enables  all  the  powers  of  good  to  be  in- 
telligently applied  to  prevention  and  cure. 

Another  illustration  of  the  function  of  the  econo- 
mist may  not  be  amiss.  We  know  that  it  is  the 
chemist  who  studies  the  nature  of  a  drug  and  its 
action  on  the  human  body,  but  that  it  is  the  phy- 
sician who,  after  considering  such  facts  as  the 
patient's  constitution  and  habits  of  life,  decides 
when  it  is  right  or  wrong  to  use  this  drug  in  par- 
ticular cases.  The  economist  studies  the  nature 
of  economic  phenomena,  their  causes  and  effects; 
but  he  does  not — as  an  economist — necessarily 
address  himself  to  prevent  their  effects  or  to 
remedy  evils.  This  is  the  work  of  the  moral 
teacher.  It  is  true  that  economists  may  also  be 
moral  teachers,  as  were  Adam  Smith  and  John 
Stuart  Mill;  and  so  a  chemist  may  also  be  a  phy- 
sician; but  the  two  are  not  always  synonymous. 
A  man  who  sets  himself  up  as  a  moral  adviser  on 
social  and  economic  questions  must  be  pretty  well 

122 


POLITICAL  ECONOMY  AND  CHRISTIANITY 

established  in  his  economic  beliefs  to  have  an  easy 
conscience;  if  he  is  not,  he  assumes  the  criminal 
attitude  of  the  ignorant  druggist  who  compounds 
for  an  unsuspecting  patient  a  deadly  poison,  in- 
stead of  a  relieving  draught.  Many  of  our  an- 
archists are  like  these  ignorant  druggists. 

We  thus  see  that  the  responsibility  of  the  student 
of  economic  and  social  conditions  is  a  heavy  one. 
But  after  all  it  is  only  a  part  of  the  general  respon- 
sibility which  every  honest-minded  man  must  feel 
as  regards  his  relations  to  the  whole  world  around 
him.  The  morality  of  Christian  teaching,  on  the 
other  hand,  must  find  its  harmony  in  economic 
results,  or  the  Christian  teacher  cannot  accept  the 
laws  which  economists  lay  down.  A  responsibility 
thus  also  lies  on  Christians  to  be  sure  that  economic 
teaching  is  consonant  with  the  principles  of  Chris- 
tianity. And  it  is  on  this  point  that,  as  a  layman,  I 
should  like  to  address  a  short  sermon  to  the  pulpit. 


One  of  the  essential  ideas  of  Jesus's  life  and 
teaching  was  self-sacrifice.  Not  self-sacrifice  from 
the  pure  love  of  repression,  which  often  charac- 
terized our  Puritan  fathers,  but  the  renunciation 

123 


LATTER-DAY  PROBLEMS 

of  self  for  a  higher,  nobler  gain.  In  fact,  the  cul- 
mination of  His  life  in  a  painful  death  was  a  sub- 
lime act  of  self -sacrifice,  by  which  the  attention  of 
the  world  and  of  succeeding  ages  was  called  to 
the  higher  life  to  which  He  invited  them.  It 
taught  us  that  character  was  to  be  sought  by  self- 
control  ;  by  doing  that  which  was  right  against  our 
natural  inclinations;  by  loving  the  good  that  was 
in  others  even  if  they  had  wronged  us ;  by  purify- 
ing the  human  and  earthly  parts  of  us  until  they 
were  more  or  less  altered  after  a  God-like  spirit; 
by  learning  the  superior  value  of  the  unseen, 
spiritual  good  over  the  seen  and  present  enjoy- 
ment. In  short,  the  power  of  Christianity  as  it 
moved  over  the  earth,  helping  on  civilization,  set 
in  the  mind  of  the  artisan  at  his  work,  the  sailor 
in  his  ship,  the  scholar  in  his  study,  the  orator  at 
the  forum,  the  secret  of  success  and  of  progress  by 
teaching  the  superior  value  of  the  unseen  over  the 
seen;  by  teaching  the  mind  to  picture  the  future 
which  is  seen  only  in  ideals  and  visions,  and  then 
to  sacrifice  present  enjoyments  for  the  sake  of 
realizing  those  future  ideals  and  visions.  Chris- 
tianity set  the  spiritual  over  against  the  material, 
the  unseen  over  against  the  temporary  and  seen; 
and  its  teachings  pointed  to  self-mastery  as  the 

124 


POLITICAL  ECONOMY  AND  CHRISTIANITY 

means  by  which  the  future  gain  was  to  be  real- 
ized. Charity,  kindliness,  good- will,  unselfishness 
were  to  be  followed  in  spite  of  the  fact  that  the 
flesh  holds  back  and  seems  a  stranger  to  the  higher 
motive. 

When  Christianity  sets  before  us  this  hope  of  a 
desirable  future,  and  draws  a  picture  of  the  higher 
life,  which  so  impresses  the  imagination  that  the 
power  of  the  material  present  loses  its  influence 
over  us,  it  is  then  laying  the  broad  foundation  for 
economic  prosperity  and  success  for  every  toiler  on 
this  earth.  In  fact,  we  find,  here,  that  in  our  efforts 
to  satisfy  material  wants,  the  fundamental  eco- 
nomic principles  are  but  statements  of  the  form  in 
which  Christian  ideas  take  shape;  these  principles, 
in  other  words,  are  but  the  ducts  into  which  are 
drawn  off  parts  of  Universal  Truth,  and  this  truth 
comes  out  again,  reappearing  in  our  economic 
statements.  In  days  past  we  have  sometimes 
heard  contemptuous  criticisms  on  the  "  dismal 
science"  of  political  economy;  so  that  what  we 
have  just  said  seems  perhaps  to  be  an  audacious 
claim;  but  the  reader  is  asked  to  examine  briefly 
the  fundamental  laws  of  economic  production. 


125 


LATTER-DAY  PROBLEMS 

m 

The  first  of  these  is  the  law  of  the  increase  of 
capital.  Capital  is  the  result  of  saving.  Now 
think  for  a  moment  what  saving  means.  In  Mr. 
Mill's  treatise  he  points  out  most  justly  that  "all 
accumulation  involves  the  sacrifice  of  a  present  for 
the  sake  of  a  future  good."  In  short,  economists 
generally  speak  of  foregoing  present  consumption, 
or  waiting,  as  a  necessary  condition  to  production 
— which  it  unquestionably  is.  Capital,  says  the 
economist,  increases  not  merely  because  of  the 
amount  of  interest  to  be  got  from  savings,  but, 
other  things  being  equal,  because  of  the  "effective 
desire  of  accumulation";  and  this  desire  to  accu- 
mulate, as  we  see,  depends  entirely  on  the  power  so 
far  to  grasp  hold  of  the  future  ideal  that  a  present 
enjoyment  will  be  given  up  in  order  to  realize  it. 
The  ability  to  weigh  the  future  against  the  present 
is  only  a  paraphrase  of  foresight,  of  prudence,  or 
saving.  Of  the  less  civilized  races  of  man — and  it 
is  no  less  true  of  the  lowest  strata  of  even  civilized 
countries — Mr.  Mill  says :  "  Man  may  be  said  to  be 
necessarily  improvident,  and  regardless  of  futurity, 
because,  in  this  state,  the  future  presents  nothing 
which  can  be  with  certainty  either  foreseen  or 

126 


POLITICAL  ECONOMY  AND  CHRISTIANITY 

governed.  Besides  a  want  of  the  motives  exciting 
to  provide  for  the  needs  of  futurity,  .  .  .  there  is  a 
want  of  the  habits  of  perception  and  action,  lead- 
ing to  a  constant  connection  in  the  mind  of  those 
distant  points,  and  of  the  series  of  events  serving 
to  unite  them."  These  principles  are  illustrated  by 
the  familiar  cases  of  the  St.  Lawrence  Indians  and 
the  Indians  of  Paraguay.  They  were  willing  to 
work  assiduously;  but  their  minds  were  so  weak 
in  imagination  that  they  did  not  see  a  future  end 
distinctly  enough  to  plant  only  the  little  crop  of 
potatoes  and  maize,  which  mature  at  a  short  in- 
terval of  time  after  the  planting.  For  the  same 
reason  the  Paraguay  Indians  cut  up  their  plough- 
ing-oxen  for  supper  at  the  end  of  a  day's  labor. 
From  this  analysis  of  motives,  economists  teach 
that  if  the  ability  to  sacrifice  present  enjoyments 
for  a  future  gain  is  absent,  little  capital  will  be 
saved  even  from  a  large  margin;  if,  on  the  other 
hand,  it  is  present  and  to  a  high  degree,  much 
capital  will  be  saved  even  from  a  very  small  margin. 
Consider  for  a  moment  how  this  applies  to  the 
workman,  who  owns  nothing,  lives  in  a  hired 
house,  and  is  only  a  receiver  of  wages.  What  are 
the  mental  processes  through  which  he  must  go, 
in  order  to  save  ?  On  the  one  side  are  the  seduc- 

127 


LATTER-DAY  PROBLEMS 

tions  which  urge  him  to  spend  the  whole  of  his 
wages  as  fast  as  they  are  earned;  his  pride  leads 
him  to  clothe  his  family  for  show  rather  than  for 
comfort;  he  is  fond  of  his  tobacco,  if  of  nothing 
worse ;  he  indulges  in  favorite  articles  of  food  and 
takes  certain  amusements.  On  the  other  side 
stands  the  estimate  he  places  on  a  home  of  his 
own;  on  the  little  piece  of  ground  which  he  can 
till  and  improve  at  odd  times;  on  the  possession 
of  a  cow,  and  the  additional  income  it  may  give; 
and  on  the  higher  standing  among  his  neighbors 
which  some  accumulation  will  bring  him.  Will 
he  care  enough  for  these  future  and  distant  gains 
to  sacrifice  his  present  enjoyments?  Often,  how- 
ever, he  has  no  training  of  mind  which  will  enable 
him  to  connect  distant  events  with  present  action. 
If  this  be  so,  how  far  are  the  friends  of  workmen 
strengthening  his  power  over  the  future;  are  we 
doing  all  we  can  to  present  a  vivid  picture  of  the 
fruits  and  gains  of  present  sacrifice?  And  here, 
it  seems  to  me  that  Christianity  is  the  necessary 
buttress  and  foundation  for  saving.  Has  the  man 
the  real  grasp  on  the  Christian  idea  of  self-sacrifice 
for  a  higher  aim,  of  estimating  the  unseen  against 
the  seen,  his  mind  will  find  it  easy  to  accomplish 
material  saving.  It  may  be  said  that  this  is  a 

128 


POLITICAL  ECONOMY  AND  CHRISTIANITY 

gross  aim,  and  far  from  the  spiritual  idea  of  the 
unseen;  that  to  save  for  a  material  recompense  is 
not  the  highest  form  of  self-renunciation,  not  equal 
to  that  renunciation  which  expects  no  return.  And 
this  is  true;  but  it  is  only  the  exercise  of  the  gen- 
eral principle  in  one  of  the  details  of  daily  exist- 
ence; and  if  material  riches  replace  want  with 
comfort,  misery  with  happiness,  that  is  not  merely 
a  material  gain. 

The  second  law  of  economic  production  to  be 
considered  is  the  law  of  population ;  and  this  can- 
not be  stated  independently  of  the  law  of  produc- 
tion from  land.  So  that  this  examination  really 
covers  the  three  fundamental  laws  of  production: 
the  laws  of  capital,  of  labor,  and  of  land.  The 
power  of  human  beings  to  multiply  is  such  that 
mankind  can  increase  faster  than  can  the  produce 
of  land.  If  no  restraint  hinder  it,  a  population  can 
double  itself  in  a  certain  period,  and  that  doubled 
number  can  again  double  itself  in  another  similar 
period;  while,  on  the  other  hand,  after  a  certain 
point  has  been  reached,  if  capital  and  labor  applied 
to  an  acre  of  land  produce  30  bushels  of  wheat,  a 
second  application  of  the  same  amount  of  capital 
and  labor  will  not  produce  an  additional  30  bushels 
on  the  same  acre,  or  60  bushels  in  all.  A  given 

129 


LATTER-DAY  PROBLEMS 

piece  of  land  cannot  increase  its  product  propor- 
tionally to  the  increased  outlay  of  labor  and 
capital;  else  why  cannot  all  the  food  of  the  Amer- 
ican people  be  drawn  from  one  county,  or  even 
from  one  farm  ?  The  physiological  power  of  man 
taken  in  connection  with  the  physical  qualities  of 
the  soil  furnishes  the  solid  basis  of  this  economic 
law.  This  relation  between  numbers  and  food 
has  been  pointed  out  by  economists;  and  it  is  this 
principle  which,  in  the  language  of  opponents, 
once  gave  the  opprobrious  title  of  the  "dismal 
science"  to  political  economy.  This  charge  of 
dismalness  has  arisen  from  the  statements  by 
economists  as  to  the  manner  in  which  the  power  of 
increase  has  been  actually  made  to  conform  to 
the  production  of  subsistence.  They  pointed  out 
that  a  thoughtless  increase  of  numbers  out  of  pro- 
portion to  the  increase  of  subsistence  among  peo- 
ple of  a  low  order  of  civilization  was  followed  by 
death  resulting  from  war,  famine,  or  pestilence; 
but  that,  as  men  had  advanced  in  civilization  and 
intelligence,  an  imprudent  increase  of  numbers 
was  prevented  by  a  lessening  number  of  births. 
In  such  ways  have  numbers  in  fact  been  kept 
down  to  the  actual  production  of  subsistence. 
This  is  the  contribution  to  political  economy 

130 


POLITICAL  ECONOMY  AND  CHRISTIANITY 

which  we  owe  to  a  clergyman,  the  Rev.  Thomas 
R.  Malthus. 

That  to  a  clergyman  this  economic  principle  may 
have  been  another  form  of  Christian  teaching  does 
not  seem  at  all  unnatural.  In  fact,  it  is  but  an- 
other expression  of  the  worth  of  the  future  as  com- 
pared with  the  present;  and  that  it  should  have 
been  the  object  of  attack,  and  designated  as  "un- 
christian" and  "hopeless,"  is  one  of  the  many 
curious  facts  of  history.  When  men  were  able  so 
to  control  human  desires  that  they  might  better 
provide  comfort  and  happiness  for  their  families 
in  the  future,  they  were  displaying  the  ideas  of 
foresight  and  prudence,  which,  as  I  have  tried  to 
show,  are  so  fundamentally  connected  with  essen- 
tial Christian  teaching.  The  power  to  bring  the 
future  so  strongly  before  the  mind  that  the  present 
action  is  guarded  and  controlled  by  it  has  gone 
hand  in  hand  with  Christian  civilization.  In  re- 
gard to  the  expenditure  of  capital  for  distant 
returns,  as  in  docks,  bridges,  railways,  and  ma- 
chinery, we  have  seen  this  control  exercised  more 
frequently,  and  to  a  greater  and  greater  extent  as 
this  civilization  has  gone  on;  and  that  it  should 
have  shown  itself  also  in  other  forms  of  human 
activity  is  to  have  been  expected.  That  its  ab- 


LATTER-DAY  PROBLEMS 

sence  would  have  required  explanation,  should  be 
less  surprising  than  that  its  existence  should  have 
caused  bitter  attack.  As  men  grew  in  civilization 
they  gained  in  the  power  to  estimate  the  future  as 
compared  with  the  present;  and  numbers  were 
limited  by  foresight  to  correspond  more  nearly 
with  the  standard  of  living  of  different  classes. 
This  was  but  the  application  to  population  of  the 
power  of  the  Christian  teaching  of  a  regard  for  the 
future  over  the  present.  It  is  the  basis  of  advice 
which  an  economist  might  give  to  the  workman 
with  a  very  small  income  who  aims  to  improve  his 
position. 

The  law  of  population  to  which  I  have  just  re- 
ferred is  often  thought  of  as  harsh  and  inhuman. 
The  law  is,  however,  nothing  but  colorless  scien- 
tific truth.  In  stating  cause  and  effect  nothing 
whatever  is  implied  about  humanity  or  inhuman- 
ity. When  economists  say  that  unrestricted  in- 
crease of  numbers  among  the  very  poor  brings 
misery  and  want,  they  are  only  stating  the  relation 
of  cause  and  effect.  The  question  of  ethics  comes 
in  when,  knowing  this  principle,  men  disregard  it, 
and  throw  themselves  under  the  tyranny  of  a  des- 
potic law.  We  are  still  responsible,  not  only  for  our 
own  actions,  but  for  our  attitude  to  those  around  us. 

132 


POLITICAL  ECONOMY  AND  CHRISTIANITY 

I  have  said  that  as  men  grew  in  civilization  the 
inevitable  results  of  over-population  have  been 
avoided  by  prudence  and  foresight.  This  general 
principle,  however,  has  a  more  detailed  applica- 
tion. In  society  there  are  higher  and  lower 
classes  as  regards  prudence.  At  the  bottom  of  the 
industrial  strata  lies  the  largest  class,  composed, 
roughly  speaking,  of  unskilled  persons,  with  no 
capital,  little  education,  narrow  ideas,  and  nar- 
rower ambition.  This  class,  everywhere  among 
us  to-day,  is  relatively  to  the  more  prudent,  the 
"uncivilized";  they  have  little  power  to  sacrifice 
the  present  impulse  for  a  future  advance.  They  are 
the  class  to  which  the  law  of  population  gives  an 
important  aid  to  improvement;  it  is  simple  com- 
mon sense  to  say  that  three  children  can  be  better 
provided  for  than  seven.  Relatively  to  the  demand 
for  work  which  they  can  do,  this  class  is  enor- 
mously larger  than  any  other  class;  and  yet  it  is 
exactly  in  this  class  that  numbers  are  increased 
without  much  thought  of  the  coming  want  and 
misery.  The  amount  of  subsistence  offered  for 
work  which  the  unskilled  and  ignorant  can  do  is 
vastly  out  of  proportion  to  their  great  numbers. 
While  in  classes  of  skilled  persons  numbers  are 
fewer  relatively  to  the  demand  for  them,  wages  are 

133 


LATTER-DAY  PROBLEMS 

higher,  and  they  are  more  prudent.  So  that  fore- 
sight is  least  observed  in  the  classes  where  it  is 
most  needed,  and  is  most  observed  in  classes  where 
it  is  least  needed.  Political  economy  does  not 
teach  a  restriction  of  the  numbers  of  the  best,  but 
of  the  poorest  persons;  not  of  the  highest,  but  of 
the  lowest,  type.  The  limitation  of  numbers  to  a 
standard  of  living,  therefore,  is  to  be  applied  not 
merely  in  a  general,  but  in  a  detailed,  way  to 
different  classes  of  society.  To  the  poorest  and 
most  hopeless  this  economic  principle  carries  the 
Christian  teaching  of  the  wisdom  of  setting  an 
estimate  of  the  future  above  the  estimate  of  the 
present. 

IV 

So  far  we  have  been  examining  the  laws  of  Pro- 
duction and  their  harmony  with  fundamental 
Christian  truths.  We  may  now  turn  to  the  ques- 
tions of  Distribution,  which  include  the  subjects 
of  wages,  interest,  and  rent,  and  bring  us  to  the 
burning  social  struggles  of  the  present  time. 

In  the  assignment  of  a  payment  to  the  owner 
of  natural  resources,  or  land,  there  is  little  of  an 
ethical  character — except  in  the  institution  of 
property  itself.  That  is,  so  long  as  society  be- 

134 


POLITICAL  ECONOMY  AND  CHRISTIANITY 

lieves  that  more  good  than  evil  comes  from  grant- 
ing ownership  in  certain  gifts  of  nature  the  price 
for  the  use  of  such  gifts  depends  upon  bargains 
voluntarily  entered  into  between  the  owners  and 
those  who  wish  to  use  them.  If  these  gifts  are,  as 
in  most  cases,  limited  in  supply,  the  price  is  a 
question  of  monopoly  value.  If  the  demand  for 
wheat  and  wheat  land  increases,  the  price  of  wheat 
and  the  rent  of  wheat  land  will  rise — provided  there 
is  no  opening  up  of  new  lands,  or  no  improvements 
in  the  methods  of  treating  the  soil  which  will  have 
the  effect  of  increasing  the  supply.  Therefore,  in 
paying  rent  for  resources  limited  in  supply — due 
either  to  quality  or  location — there  is  no  more  play 
for  ethical  analysis  than  in  arriving  at  the  price  of 
any  other  commodity  in  the  open  market.  Of 
course,  rent  would  not  be  paid,  if  monopoly  con- 
ditions, either  natural  or  artificial,  ceased  to  exist; 
and  ethical  considerations  may  thus  arise  in  re- 
gard to  the  conditions  under  which  monopoly  ap- 
pears. For  instance,  some  may  hold  it  to  be  wrong 
to  allow  any  private  ownership  of  land ;  and  com- 
munal tenures  may  be  supposed  to  be  more  Chris- 
tian. Whatever  may  be  the  views  of  a  few,  the  fact 
remains  that  for  about  thirteen  centuries  our  race 
has  continuously  incorporated  in  its  customs  and 

135 


LATTER-DAY  PROBLEMS 

law  the  belief  that  private  ownership  of  nature's 
gift  makes,  under  certain  restrictions,  for  the  great- 
est good  of  all.  So  far  as  the  moral  qualities  of 
energy,  effort,  industry,  and  a  grasp  of  the  future 
arise  from  holding  possession  of  the  soil,  so  far  the 
institution  has  a  moral  justification.  And  only  so 
long  as  the  gains  from  private  ownership  exceed 
the  losses  can  the  right  to  private  property  find 
its  defense  on  moral  grounds. 


In  passing  to  the  payment  of  interest  for  the  use 
of  capital,  we  again  strike  moral  considerations. 
After  all  has  been  said  and  done,  it  must  be  ad- 
mitted that  the  accumulation  of  capital  is  the  out- 
come of  the  strongest  moral  forces  of  society.  This 
has  already  been  emphasized.  Without  the  moral 
grip  on  the  future  by  which  present  action  has 
been  controlled,  we  should  never  have  acquired 
the  present  marvelous  mechanical  equipment  of 
industry  on  which  the  existing  welfare  of  masses 
of  men,  high  and  low,  are  directly  dependent. 
Any  attempt  to  undermine  the  incentives  to  the 
accumulations  of  capital,  or  to  make  impossible 
just  payments  for  the  use  of  it  after  it  has  been 
accumulated,  aims  directly  at  the  moral  founda- 

136 


POLITICAL  ECONOMY  AND  CHRISTIANITY 

tions  on  which  much  that  is  best  of  existing  in- 
stitutions rests.  Envy,  or  ignorance,  in  these  days, 
appears  to  think  that  baiting  capital  is  an  act  of 
virtue.  Although  it  may  be  popular,  it  is  exceed- 
ingly stupid,  and  shows  a  lack  of  the  historical 
sense.  Moreover,  it  is  quite  aside  from  the  point. 
Capital  in  itself,  and  the  payment  of  interest  for 
its  use,  are  as  necessary  to  society's  comfort  and 
progress  as  are  air  and  sunshine  to  plant  life ;  and 
yet  there  is  more  or  less  revolutionary  muttering 
about  capitalism.  There  is,  however,  a  very  grave 
difference  between  capital  and  capitalism.  Here 
is  to  be  found  the  core  of  the  whole  matter.  Cap- 
italism is  obviously  the  relation  of  human  beings 
to  capital.  Capital  in  itself  is  what  every  one  de- 
sires; the  only  difficulty  appears  to  be  that  there 
is  not  enough  of  it.  But  the  attitude  of  owners  of 
capital  to  those  who  do  not  possess  it  seems  to  be 
the  cause  of  the  irritation.  It  is  not  capital,  but 
what  man  does  with  capital,  that  makes  the  real 
moral  issue.  To  inveigh  against  capital  itself  is 
like  finding  fault  with  the  superior  steamship 
which  carries  passengers  quickly  and  safely.  Then 
what  is  meant  by  the  wrongs  of  capitalism  ?  Re- 
duced to  its  lowest  terms,  it  seems  to  be  the 
wrongs  due  to  imperfect  human  nature  in  the  use 

137 


LATTER-DAY  PROBLEMS 

and  management  of  capital.  Obviously,  the  so- 
called  evils  of  capitalism  cannot  be  removed  by 
taking  away  the  incentives  to  saving,  nor  by  sub- 
tracting from  the  returns  to  foresight  and  pru- 
dence by  special  legislation  and  taxation  against 
capital.  The  evils  now  in  the  public  eye  can  be 
removed  only  by  removing  the  imperfections  of 
human  nature,  or  by  making  men  good.  Thus 
economic  analysis  finds  itself  in  complete  har- 
mony with  Christianity,  which  offers  the  means  of 
making  better  the  persons  by  which  capital  is  to 
be  employed.  There  is  not  only  no  conflict  but  a 
clear  agreement  between  the  economist  and  the 
Christian  worker — so  far  as  concerns  the  relation 
of  men  to  capital.  It  is  nothing  against  a  man 
that  he  is  saving  and  efficient  and  accumulates 
capital;  it  is  rather  against  a  man  that  he  is  thrift- 
less and  inefficient  and  has  no  capital.  It  is  nothing 
against  a  man  that  he  is  a  capitalist;  but  it  is 
against  him  if  he  is  a  dishonorable  man — capitalist 
or  non-capitalist — whether  he  reaps  where  he  has 
not  sown,  or  whether  he  robs  and  steals.  The  in- 
dictment runs  against  the  morality  of  the  man,  not 
against  the  tools  or  capital  he  uses.  We  do  not 
convict  the  knife,  but  the  assassin,  when  we  try  to 
exact  justice  against  a  murderer.  And  yet  in  the 

138 


POLITICAL  ECONOMY  AND  CHRISTIANITY 

confused  and  crude  thinking  of  the  day  about 
capitalism,  there  is  an  implication  that  the  system 
is  wrong  which  permits  private  ownership  of  cap- 
ital and  that  all  capital  should  be  placed  under  the 
control  of  the  state.  When  we  realize  that  saving 
of  capital  is  the  outcome  of  a  personal  process — 
or  at  least  of  non-consumption  by  individuals — we 
might  as  well  say  that  the  state  should  own  all  the 
pictures  painted  by  artists,  or  all  the  music  ever 
composed.  The  state  did  not  create  capital;  and 
it  could  not  own  capital  except  by  exploiting  it 
unjustly  from  individuals  who  brought  it  into 
existence. 

Possibly  the  literal  injunction  that  interest  is 
usury  and  unchristian  may  trouble  the  pious.  We 
have  fully  shown  how  saving  is  in  essential  har- 
mony with  Christian  teaching;  if  so,  interest  is  no 
more  unscriptural  than  buying  and  selling  any 
useful  thing.  The  borrower  of  an  ass  would  be 
unchristian  if  he  did  not  pay  its  hire;  and  he  who 
hides  his  talent  in  a  napkin  and  puts  it  not  to  use 
where  it  would  earn  something  is  condemned  by 
the  scriptures.  An  ass,  a  horse,  or  wealth  in  the 
form  of  money,  are  common  instruments  by  which 
capital  is  invested,  and  for  which  interest  is  paid. 


139 


LATTER-DAY  PROBLEMS 


VI 


In  the  field  of  distribution,  it  is  in  the  burn- 
ing question  of  wages  and  human  effort  that  we 
find  the  most  obvious  problems  of  ethics;  and 
here  the  relation  of  Christianity  to  economic  teach- 
ing is  one  much  discussed.  The  pulpit  frequently 
speaks  of  the  wrong  implied  in  the  possession  of 
large  accumulations  of  capital  which  loom  big 
alongside  the  poverty  of  the  many.  The  implica- 
tion of  wrong  here  depends  entirely  on  the  assump- 
tion that  capital  is  accumulated  at  the  expense  of 
others.  If  it  is  possible,  however,  to  gather  large 
sums  honestly,  by  abstinence,  reinvestment,  and 
good  business  management,  then  no  one  else  is 
wronged;  in  fact  others  are  thereby  aided  in  get- 
ting employment.  On  the  other  hand,  if  men  grow 
rich  by  despoiling  others,  then  the  wrong  is  in  the 
man,  and  he  should  be  brought  to  book,  just  as  a 
burglar  or  common  thief  should  be.  One  might  as 
well  say  that  great  elms  are  wrong  when  seen 
alongside  of  little  newly  planted  saplings,  as  to  say 
that  large  accumulations  of  capital  are  in  them- 
selves wrong  while  men  are  still  poor.  A  great  elm 
is  no  reason  why  a  sapling  should  not  itself  in  time 
grow  great.  The  chief  wrong  is  that  the  many 

140 


POLITICAL  ECONOMY  AND  CHRISTIANITY 

have  not  yet  caught  the  spirit  and  ability  to  save 
and  invest  safely.  So  long  as  the  drink  and  tobacco 
bill  is  counted  in  untold  millions,  there  is  still 
room  for  the  poor  to  accumulate  capital  and  enjoy 
its  rewards  pro  tanto. 

The  payment  for  the  use  of  capital  in  produc- 
tion is  Interest;  the  payment  for  the  exertion  of 
labor,  is  Wages.  The  word  "profits"  is  a  mislead- 
ing term,  and  for  this  reason:  the  "profit"  of  a 
capitalist  is  commonly  used  as  if  it  were  due  to 
the  ownership  of  capital;  but  in  what  is  called 
"profit"  there  is  included  by  practical  business 
men  not  merely  the  interest  paid  for  the  use  of  the 
capital  invested,  but  an  additional  sum,  which  in- 
cludes what  is  distinctly  in  the  nature  of  wages  for 
services  as  a  manager  as  well  as  some  differential 
gains.  After  getting  a  dividend  on  his  capital,  every 
manager  also  expects  to  be  paid  for  his  services — 
just  as  every  moulder  or  carpenter  is  paid  for  his 
services.  These  two  payments  are  of  wholly  differ- 
ent kinds,  and  are  governed  by  different  principles. 
In  short,  the  manager  of  a  business,  whether  he 
owns  capital  or  not,  is  unmistakably  a  laborer;  and 
the  reward  for  his  exertion  is  governed  by  the  same 
principles  which  govern  the  share  of  the  different 
kinds  of  labor.  Interest  is  the  payment  for  the 

141 


LATTER-DAY  PROBLEMS 

ownership  of  capital;  and  although  interest  and 
wages  may  be  paid  to  the  same  man,  they  are  not, 
for  that  reason,  any  the  less  separate  and  distinct 
in  their  nature.  When  we  hear  people  talk,  then, 
about  a  "conflict  between  labor  and  capital,"  it 
ought  to  appear  in  the  struggle  for  the  relative 
shares  which  labor  and  capital  receive  out  of  the 
product.  But,  as  we  have  said,  the  share  of  labor 
is  wages,  and  the  share  of  capital  is  interest.  If 
there  is  a  conflict  between  labor  and  capital,  it 
ought  to  show  itself  in  the  relative  amounts 
assigned  to  wages  and  interest.  We  shall  find, 
however,  that  the  outcome  of  the  processes 
by  which  these  distributive  shares  are  deter- 
mined does  not  show  that  the  laborer  is  losing 
in  the  struggle. 

In  every  industrial  operation — as  now  carried 
on — we  know  that  a  supply  of  capital  as  well  as  a 
supply  of  labor  is  necessary.  They  are  as  neces- 
sary to  each  other  as  the  two  blades  of  a  scissors. 
Hence,  of  two  things  both  essential,  if  one  becomes 
abundant  relatively  to  the  other,  that  one  can 
exact  but  a  smaller  return  for  its  use,  and  the  one 
which  is  relatively  scarce  will  exact  a  larger  return. 
In  brief,  the  relative  shares  of  labor  and  capital 
will,  other  things  being  equal,  depend  upon  the 

142 


POLITICAL  ECONOMY  AND  CHRISTIANITY 

relative  scarcity  and  abundance  of  labor  and  cap- 
ital. If,  for  example,  immigration  should  add 
greatly  to  the  number  of  workingmen  in  the  United 
States  without  a  corresponding  addition  to  such 
capital  as  is  offered  in  the  form  of  employment,  then 
the  share  which  each  laborer  can  demand  will  be 
somewhat  less  than  before.  If,  on  the  other  hand, 
capital  offered  to  laborers  should  increase  more 
rapidly  than  laborers,  the  division  will  be  altered 
in  favor  of  the  laborer.  When  capital  is  abundant 
and  everywhere  seeking  employment,  you  find  that 
there  are  more  situations  offered  to  employees,  and 
wages  and  salaries  go  up.  If  business  is  bad,  and 
capital  is  timid,  employment  is  hard  to  find. 
Moreover,  the  competition  of  capitalists  with  one 
another  in  the  market  is  far  keener  than  the  com- 
petition of  laborers  with  one  another  for  employ- 
ment, great  as  that  is;  and  when  capital  grows 
rapidly,  the  fall  in  the  rate  of  interest  for  the  use 
of  capital  is  a  natural  result. 

In  spite  of  the  increasing  demand  for  capital  in 
recent  years  due  to  the  opening  of  our  new  re- 
sources, and  the  widening  opportunity  for  invest- 
ment, the  rate  of  interest  on  sound  investment  in 
the  United  States  has  been,  as  a  matter  of  fact, 
steadily  falling,  or  at  least  it  has  not  risen.  Every 

143 


LATTER-DAY  PROBLEMS 


banker  can  give  evidence  on  this  point;  every 
depositor  in  a  savings  bank  has  found  this  out. 
The  high  rate  of  interest  on  capital  loaned  on 
Western  farm  mortgages  has  fallen.  At  least,  the 
proportional  share  of  capital,  for  its  use  in  pro- 
duction, has  not  risen.  There  is  absolutely  no 
question  as  to  the  fact.  If  then,  the  proportion 


Wages  of  Workmen 

Wages  of  Employer 
Interest 
FIG.  i 


which  interest,  BC  (Fig.  i),  bears  to  the  whole, 
AC,  has  not  risen,  the  amount  which  goes  to  labor 
as  wages,  AB,  has  not  decreased.  So  far  as  the 
"conflict  between  capital  and  labor"  is  concerned, 
the  conflict  does  not  appear  to  be  going  against  la- 
bor. One  cannot,  therefore,  believe  in  any  conflict 
between  labor  and  capital  in  this  sense.  The  facts, 
in  truth,  show  an  increase  in  the  money  wages  of 
labor  in  the  last  fifty  years,  a  decrease  in  the  hours 

144 


POLITICAL  ECONOMY  AND  CHRISTIANITY 

of  labor,  and  a  fall  in  the  prices  of  many  of  the 
articles  consumed  by  the  laborer. 

But  that  a  real  "conflict"  exists,  one  which 
causes  struggles  and  misunderstandings  and  a 
sense  of  wrong,  no  one  can  doubt  in  these  days  of 
labor  agitations.  We  must  admit  that  a  very  dis- 
tinct and  bitter  "conflict"  does  exist,  and  one 
which  we  are  not  to  get  rid  of  very  soon.  Let  us 
then  try  to  ascertain  where  it  is.  In  the  diagram 
(Fig.  i),  all  that  was  not  interest,  or  AB,  was  to 
be  divided  as  wages  among  different  classes  of 
laborers.  And  it  will  be  remembered,  also,  that 
we  regarded  the  manager  and  owner  as  a  laborer, 
who  gives  his  time,  ability,  experience,  and  execu- 
tive energy,  and  for  which  he  earns  wages,  apart 
from  any  interest  on  capital  that  he  may  have  in- 
vested. AB,  then,  is  to  be  divided  among  the 
various  classes  of  laborers.  One  does  not  find  in 
the  "labor  problem,"  as  it  is  called,  a  dangerous 
conflict  between  labor  and  capital,  because  inter- 
est, or  the  proportional  share  of  capital,  is  in  fact 
not  increasing;  and  the  absolute  rate  of  wages 
is  very  largely  affected  by  great  advances  in  the 
efficiency  of  production;  but  one  does  find  in  it  a 
conflict  of  laborer  with  laborer,  of  the  lower  against 
the  higher,  of  different  degrees  of  skill  against  each 

145 


LATTER-DAY  PROBLEMS 

other — or  the  same  venerable  conflict,  which  is  as 
old  as  society,  and  likely  to  last  as  long  as  men 
remain  unequal,  as  they  are,  and  have  been  in  the 
past. 

The  body  of  laborers  can  be  roughly  divided 
into  several  classes,  as  was  shown  in  a  former 
chapter.1  It  is  not  necessary  to  demonstrate  that, 


/    E    \ 

/    » 

V 

/        c 

\ 

/              B 

\ 

/               A 

\ 

FIG.  2 

although  men  are  equal  politically,  they  are  not  all 
equal  in  capacity  or  training.  X's  vote  may  be 
as  effective  as  Y's,  but  X  may  not  begin  to  com- 
pare with  Y  in  the  management  of  a  great  factory. 
The  explanation  of  a  great  deal  of  social  philosophy 
based  on  the  right  of  a  man  to  enjoy  equal  wages 
with  every  other  man  in  the  community,  is  to  be 
found  in  the  strength  of  this  idea  of  political 
equality  in  the  eyes  of  the  State ;  and  by  easy  logic 

1  Chapter  HI,  p.  56. 
146 


POLITICAL  ECONOMY  AND  CHRISTIANITY 

it  is  supposed  to  be  equally  true  in  the  radically 
different  system  of  industrial  life. 

Now  the  distribution  of  AB  is  made  among  the 
various  classes  of  laborers,  A,  B,  C,  D,  and  E; 
and  all  these  classes  of  laborers  are  necessary  to 
production.  But  the  employment  offered  for  these 
classes  does  not  correspond  to  the  number  of  la- 
borers in  each  of  the  several  classes;  those  lowest 
down,  in  A,  form  the  largest  group  relatively  to 
the  demand  for  their  work,  and  the  competition 
of  a  large  body  of  men  within  their  own  group 
keeps  wages  low;  those  higher  up  are  less  in  num- 
ber by  reason  of  a  natural  or  artificial  monopoly, 
arising  from  the  possession  of  innate  or  acquired 
skill.  Those  in  B  are  less  numerous  than  those  in 
A,  because  it  is  necessary  that  they  should  exercise 
some  skill;  they  are  protected  from  the  competi- 
tion of  all  but  the  most  enterprising  men  in  A 
(those  who  want  to  rise  in  the  scale);  and  their 
wages  are  larger  on  the  average  than  those  in  A. 
And  so  of  the  other  classes,  mutatis  mutandis. 
There  are  less  of  the  highly  skilled  in  proportion 
to  the  demand  for  them  than  of  those  in  the  lower 
classes,  and  so  their  wages  are  higher.  At  the  top. 
in  a  number  smallest  of  all,  relatively  to  the  de- 
mand for  them,  are  the  capable  industrial  man- 

147 


LATTER-DAY  PROBLEMS 

agers,  or  "captains  of  industry" — who  receive 
high  wages  because  there  are  few  of  them.  The 
earnings,  nay  even  the  very  establishment  itself, 
depends  upon  their  management.  Because  the 
men  who  can  successfully  direct  an  insurance 
company,  a  bank,  a  factory,  or  a  railway,  are  few, 
their  wages  are  high.  It  is  a  natural  monopoly. 
Were  every  laborer  in  A  as  competent  as  every  one 
in  D  and  E,  he  would  get  as  good  wages  as  those 
in  D  and  E  could  get. 

After  this  brief  explanation  of  Wages,  let  us  now 
consider  some  of  the  relations  in  which  Christian- 
ity and  education  stand  to  it.  Is  there  in  the  fun- 
damental principles  of  economic  distribution  any 
place  for,  any  harmony  with,  Christian  teaching? 
To  me  it  seems  almost  superfluous  to  ask  such  a 
question.  Christian  teaching  and  education  have 
everything  to  do.  In  order  to  secure  redress  in 
the  "conflict  of  laborers"  they  are  the  very  forces 
upon  which  the  workman  must  always  rely.  The 
whole  labor  question,  considered  from  the  point  of 
view  of  social  reform,  consists  in  enabling  a  laborer 
in  A  to  mount  upward  in  the  scale  to  B,  and  C,  or 
even  to  E,  if  he  can. 


148 


POLITICAL  ECONOMY  AND  CHRISTIANITY 

vn 

So  far,  then,  we  nave  explained  the  general  eco- 
nomic principles  by  which  wages  are  allotted .  Now, 
let  us  leave  the  discussion  of  principles  and  con- 
sider what  actual  means  exist  for  raising  men  in 
this  scale.  Do  not  understand  me  as  thinking  that 
the  whole  duty  of  man  is  accomplished  when  his 
wages  are  increased ;  for,  of  course,  there  are  other 
things  to  win  of  higher  value  than  mere  material 
wealth;  but,  still,  we  are  now  asked  to  consider 
the  differences  in  material  rewards  in  this  world, 
and  it  is  a  part  of  every  man's  life-problem  to 
study  them.  And  these  are  the  very  things  which 
are  to-day  in  everybody's  mind. 

Seeing  the  labor  problem  as  a  "conflict  of  la- 
borers," of  incapacity  against  capacity;  and  be- 
lieving that  as  men  rise  in  the  scale,  both  their 
wages  and  their  chances  of  a  further  rise  increase, 
I  have  already  suggested  in  Chapter  III  some 
practical  means  for  aiding  in  the  advance  of  work- 
ingmen.  Here,  it  may  be  permitted  to  confine 
ourselves  to  emphasizing  the  relation  of  Christian 
morals  to  the  elevation  of  the  workingman.  In 
truth,  they  lie  at  the  basis  of  industrial  progress. 
To  learn  how  to  adapt  one's  powers  to  a  given  end ; 

149 


LATTER-DAY  PROBLEMS 

to  obtain  self-mastery;  to  learn  how  to  regard  the 
future  as  above  the  present ;  to  follow  the  higher 
and  the  unseen  to  which  better  motives  call  one; 
to  learn  to  do  what  is  disagreeable  and  repugnant 
to  one's  inclination,  provided  it  is  right  and  hon- 
orable; in  short,  to  acquire  character — this  will 
enable  a  man  to  rise  in  the  moral  scale,  "to  take 
up  his  bed  and  walk."  As  he  becomes  a  better 
man  morally  he  will  become  a  better  [man  indus- 
trially; as  he  rises  he  gets  into  a  less  crowded  class; 
he  is  better  able  to  see  around  him;  and  so  he  learns 
to  rise  still  higher.  As  he  gains  one  advantage, 
that  becomes  an  additional  assistance  in  his  up- 
ward journey ;  he  grows  in  power  as  he  advances. 
There  is  thus  in  economic  conditions  an  exact 
illustration  of  the  biblical  precept :  "For  he  that 
hath,  to  him  shall  be  given."  The  real  difficulty 
is  in  overcoming  inertia  at  the  start ;  after  that  mere 
momentum  does  something.  And  it  is  equally  true 
that  self-mastery  must  not  be  intermitted.  Shift- 
lessness  and  intemperance  bring  their  swift  pun- 
ishment: "and  he  that  hath  not,  from  him  shall 
be  taken  away  even  that  which  he  hath." 

Yet  we  hear  it  repeated  from  many  mouths  that 
the  laborer  is  the  slave  of  the  capitalist,  that  he  is 
oppressed  and  down-trodden,  that  he  is  kept  in  a 

150 


POLITICAL  ECONOMY  AND  CHRISTIANITY 

condition  of  hopeless  serfdom.  Yes,  it  must  be  ad- 
mitted that  he  is  only  too  often  a  slave — but  not  as 
many  seem  to  think  of  it.  He  is  only  too  often  a 
slave  to  his  own  ignorance  and  incapacity.  And 
this,  too,  is  a  very  real  thing.  He  remains  a  slave, 
because  he  remains  unconscious  of  things  which 
might  stimulate  him  to  better  work;  and  if  ready 
for  better  things,  he  does  not  know  what  to  do. 
He  does  not  know  about  savings  banks,  or  co- 
operative banks,  or  building  associations,  or  co- 
operative stores,  or  evening  schools  where  he  and 
his  children  may  be  taught  the  trades;  nor  does 
he  understand  why  he  should  need  these  things. 
Here  it  seems  to  me  the  vast  mass  of  the  ignorant 
and  unfortunate  have  a  claim  upon  the  wisdom, 
advice,  and  intelligent  sympathy  of  the  successful 
and  fortunate.  It  lays  the  responsibility  on  every 
one  of  us.  Better  than  the  gift  of  money  is  the  per- 
sonal interest  and  assistance;  the  money  is  quickly 
given,  and  the  matter  is  off  the  mind;  but  the 
assistance  takes  time  and  wisdom.  In  short,  the 
solution  of  the  labor  problem  is  not  to  be  reached 
in  an  hour  or  a  year;  it  calls  on  us  for  the  exertion 
of  all  those  forces  which  have  been  operating  for 
centuries  to  civilize  and  improve  the  human  race; 
and  the  movement  of  persons  from  the  lower  into 


LATTER-DAY  PROBLEMS 

the  higher  classes,  which  will  give  higher  wages, 
must  be  accompanied  by  the  moral  sense  which 
will  govern  the  expenditure  of  the  higher  wages. 
Not  merely  more  money  and  more  comfort  should 
we  ask  for  our  fellow-men,  but  more  character. 

It  may  be  supposed  that  in  what  I  have  said 
reference  was  had  only  to  men.  The  responsi- 
bility which  lies  on  us  to  aid  in  the  material  prog- 
ress of  women  is  even  greater;  because  the  avenues 
open  to  working  women  are  fewer  than  to  working 
men;  custom  and  competition  are  much  more  in- 
fluential in  lowering  the  wages  of  women.  To  help 
them  we  must  follow  the  same  path.  We  must 
lead  women  to  see  the  value  of  saving.  But  this 
is  not  all.  Are  we  doing  all  we  might  to  establish 
free  schools  where  unskilled  women,  thrown  on 
their  own  resources,  can  learn  to  become  really 
good  cooks  and  housemaids  ?  Are  free  schools  as 
plentiful  as  they  might  be,  where  women  can  be 
trained  as  type-setters,  telegraph  operators,  type- 
writers, nurses,  wood-carvers,  decorators,  or  archi- 
tects ?  There  is  certainly  no  limit  to  the  practical 
work  to  be  done  to  make  ignorance  less  helpless, 
and  incapacity  less  discouraging. 


152 


POLITICAL  ECONOMY  AND  CHRISTIANITY 

vm 

Therefore,  when  some  persons  proclaim  that  the 
"labor  movement"  is  a  crusade  against  oppression, 
and  for  the  emancipation  of  the  workingman,  one 
scarcely  knows  what  they  mean.  Just  so  long  as 
men  remain  imperfect  and  human,  there  will  be 
found  the  bad  as  well  as  the  good.  There  is  no 
recipe  for  the  extinction  of  evil  that  we  know  of, 
which  lies  in  the  hands  of  society.  Some  persons 
represent  the  existing  evils  of  the  laborer's  lot  as 
due  to  some  artificial  constraint.  They  speak  as 
if  low  wages  are  paid  because  employers  are  op- 
pressors; they  overlook  the  grounds  for  differences 
of  wages  arising  from  differing  capacities  and  from 
overcrowding;  they  propose  to  alter  the  laws  of 
the  United  States,  or  cause  a  social  revolution,  or 
regenerate  society  in  the  twinkling  of  an  eye. 

If  there  is  any  one  thing  more  important  than 
another  to  aid  men  in  rising  to  a  higher  level  of 
comfort,  and  one  which  to  my  mind  is  funda- 
mental, that  thing  is,  as  I  have  said,  the  growth  of 
individual  character.  It  depends  on  motives 
which  have  their  results  in  individual  conduct;  it 
is  something  which  no  one  else  can  do  for  another. 
It  is  the  growth  of  self-help.  That  which  a  man 


LATTER-DAY  PROBLEMS 

accomplishes  of  and  by  himself  is  worth  not 
merely  what  that  single  result  appears  to  be,  but 
the  power  of  accomplishment,  which  is  learned  by 
the  doer.  To  save  a  sum  of  money  is  not  all  that 
is  valuable;  the  new  man  that  rises  out  of  the 
process  of  that  saving  is  different  from  the  old 
spendthrift.  By  doing  he  grew;  and  the  second 
sum  is  far  easier  to  save  than  the  first.  In  the 
struggle  for  industrial  progress,  almost  everything 
hangs  on  self-help  and  individual  exertion.  Char- 
acter must  be  made  from  within.  If  this  be  true, 
what  must  we  think  of  those  doctrines  which  are 
sometimes  taught  in  high  places,  and  which  assure 
the  workingman  that  he  is  a  victim  of  error  and  in- 
justice, down-trodden  and  oppressed  by  a  vicious 
social  system,  and  that  the  State  shall  undertake 
his  release.  An  act  of  Congress  cannot  make 
character  or  efficiency.  But  so  long  as  man  remains 
what  he  is,  he  must  not  be  enervated  in  self-help 
and  personal  energy  by  any  illusive  hopes  held  out 
to  him  from  outside.  Dependence  on  the  State, 
and  individual  self-help — the  one  is  damaging  to 
progress,  the  other  lies  at  the  root  of  all  civil,  in- 
dustrial, and  religious  advance  in  any  land. 


154 


CHAPTER  VI 
LARGE  FORTUNES 


THE  hostility  to  large  fortunes  does  not  di- 
minish with  time  and  events.  The  violent 
denunciations  of  the  discontented  classes,  or  of 
the  more  extreme  socialists,  find  an  echo  in  the 
ranks  of  the  more  conservative  groups.  Into 
these  expressions,  evidently  based  on  strong  con- 
victions, has  entered  the  sting  arising  from  a  pas- 
sionate sense  of  wrong:  that  these  enormous 
accumulations  are  possible  only  at  the  expense  of 
the  poor;  and  that  women  and  children  go  cold 
and  hungry  in  order  that  others  may  go  warmly 
clad  and  live  luxuriously.  In  this  point  of  view 
there  is  a  hopelessness  which  serves  as  the  incen- 
tive to  brute  force,  to  wild  assaults  upon  the  bul- 
warks of  property  and  institutions.  What  are  we 
coming  to?  Are  the  times  out  of  joint?  Cer- 
tainly we  are  forced  to  face  the  facts  as  found  in 
the  thinking  of  great  numbers  of  people. 

155 


LATTER-DAY  PROBLEMS 

To  say  that  a  man  is  a  multi-millionaire  is  to 
many  equivalent  to  saying  that  he  is  an  enemy  of 
society,  reaping  where  he  has  not  sown,  and  pro- 
tecting himself  in  his  vast  possessions  only  by  the 
corrupt  control  of  municipal  councils,  legislatures, 
and  even  the  highest  courts.  It  is  this  state  of 
mind  which  leads  some  intelligent  writers  to  hint 
of  another  French  Revolution,  and  of  prison  bars 
for  the  financial  kings.  Yet,  as  we  look  back  a 
century,  there  was  not,  at  least  in  the  United  States, 
any  such  antagonism  between  rich  and  poor. 
Perhaps  the  contrasts  between  the  richest  and  the 
poorest  were  far  less  marked  then  than  now,  and 
the  causes  of  dissatisfaction  due  to  impotent 
rivalry  were  more  generally  absent.  In  those 
earlier  days,  obviously,  the  total  wealth  of  the 
community  in  all  forms  was  very  small  in  com- 
parison with  its  diffusion  to-day. 

In  Parkman's  account  of  La  Salle's  marvellous 
winter  journey  from  Fort  Crevecoeur,  on  the  Illi- 
nois, to  Fort  Frontenac,  at  the  eastern  end  of  Lake 
Ontario,  we  get  a  vivid  picture  of  a  region  now 
covered  by  a  busy,  struggling,  commercial  com- 
munity. Then  "the  nights  were  cold,  but  the 
sun  was  warm  at  noon,  and  the  half- thawed 
prairie  was  one  vast  tract  of  mud,  water,  and  dis- 

156 


LARGE  FORTUNES 

colored,  half-liquid  snow."  Often  without  food, 
watching  by  night  against  Indians,  and  marching 
by  day,  loaded  with  baggage;  "sometimes  push- 
ing through  thickets,  sometimes  climbing  rocks 
covered  with  ice  and  snow,  sometimes  wading 
whole  days  through  marshes  where  the  water  was 
waist-deep,"  La  Salle  spent  sixty-five  weary  days 
in  this  thousand-mile  journey  to  Fort  Frontenac. 
How  far  in  the  past  all  that  is  now!  Over  against 
the  picture  of  La  Salle  place  another  of  a  modern 
journey  in  a  warm,  luxurious  Pullman  car,  which 
travels  over  the  same  distance  within  a  single 
day.  The  contrast  is  great;  but  what  has  hap- 
pened on  this  "half-thawed  prairie"  since  La 
Salle  passed  by?  What  are  the  forces  that  have 
changed  the  world  of  La  Salle  into  the  rich,  bust- 
ling world  of  to-day  ?  In  his  time  there  were  in 
this  region  numbers  of  human  beings,  the  same 
soil,  the  same  climate,  the  same  rivers  and  lakes 
as  now.  Why  should  there  not  have  been  then 
the  same  vast  wealth  which  we  see  about  us  now, 
— great  canons  of  skyscrapers,  miles  of  factories, 
scores  of  converging  railways,  and  millions  of 
shipping  tonnage? 

Of  the  two  chief  forces  at  work  to  produce  this 
miraculous  transformation,  evidently  one  is  the 

157 


LATTER-DAY  PROBLEMS 

power  to  grasp  an  ideal,  or  future  gain,  so  dis- 
tinctly that  present  action,  or  indulgence,  is  directly 
controlled  thereby.  This  quality  of  human  beings 
is  the  first  and  most  fundamental  characteristic 
of  civilization.  It  is  the  absence  of  it  which  forms 
the  Mexican,  the  negro,  or  the  inefficient  savage. 
So  improvident  were  the  Paraguay  Indians,  so 
Mr.  Rae  tells  us,  that  they  cut  up  their  ploughing 
oxen  for  supper.  It  is  the  presence  of  it  which 
makes  possible  the  docks,  bridges,  steamships, 
and  irrigation  schemes,  all  of  the  returns  from 
which  will  be  received  only  many  decades  hence. 
Moreover,  it  is  the  quality  which  causes  saving 
— the  very  reason  for  the  existence  of  capital. 
The  willingness  to  forego  consumption  which  pro- 
vides a  present  indulgence  in  order  to  gain  some 
future  object  is  only  a  description  of  the  process 
by  which  capital  comes  into  being. 

This  physical  world,  on  which  the  human  mind 
can  have  its  play,  is  as  interesting  in  its  capa- 
bilities as  a  conjuror's  hat;  almost  anything  can 
be  got  out  of  it,  almost  everything  depends 
upon  what  we  ourselves  are,  upon  our  skill  in 
handling  nature.  In  the  infancy  of  civilization, 
mankind,  with  but  crude,  unaided  effort,  could 
produce  only  a  little  more  than  subsistence.  This 

158 


LARGE  FORTUNES 

little  excess,  however,  could  be  saved,  put  into 
simple  implements  of  industry,  which  made 
labor  more  efficient,  again  made  possible  new 
savings,  more  implements,  and,  in  the  endless 
round  of  centuries,  the  final  accumulation  of 
travelling  cranes,  harvesters,  motors,  telephones, 
and  rapid  communication  by  steam  and  elec- 
tricity— in  brief,  all  the  marvellous  efficiency  of 
present  industry.  All  this  would  have  been  im- 
possible on  the  prairie  of  La  Salle  without  a 
people  capable  of  duly  estimating  the  future  over 
the  present. 

This  array  of  the  productive  forces  of  society 
shows  the  necessity  of  capital  to  the  present  out- 
put of  wealth  and  to  the  present  welfare  of  all 
classes.  If  men  had  not  been,  decade  after  decade, 
saving  and  storing  up  capital,  it  would  be  as  im- 
possible to  employ  the  great  mass  of  laborers  now 
existent  as  it  would  be  to  feed  an  army  in  the  field 
on  promises  instead  of  on  solid  rations.  Some 
overwise  persons  among  us  growl  ominously 
about  the  right  of  capital  to  exist  or  to  share  in 
the  results  of  production:  this  is  as  if,  forgetting 
the  necessity  of  air  for  human  existence,  we  should 
object  to  air  in  general  because  it  is  sometimes 
dirty  or  malodorous.  Capital,  it  is  true,  may  be 

159 


LATTER-DAY  PROBLEMS 

unfairly  used  by  industrial  managers;  and  yet  it 
is  quite  as  necessary  to  the  life  of  industry  as  air 
is  to  the  human  body. 

Capital,  however,  is  only  one  of  the  means  by 
which  the  human  brain  has  shown  its  capacity  to 
enlarge  the  satisfactions  of  society.  Besides  the 
implement,  there  must  be  the  power  to  direct  the 
implement.  The  second  force  necessary  to  re- 
create the  "half-thawed  prairie"  of  La  Salle  is 
the  devising  and  organizing  mind  of  the  "Captain 
of  Industry,"  the  mind  competent  to  manage 
labor  as  well  as  capital,  and  to  direct  them  both 
in  successful  enterprises.  The  possibilities  of 
production  are  never  realized  without  this  direc- 
tion by  pre-eminent  managerial  ability.  Yet  to 
some  minds,  possibly,  this  proposition  does  not 
appear  as  axiomatic. 

Seemingly,  everything  will  go  on  satisfactorily 
when  we  have  present  all  the  essential  factors  of 
production:  (i)  boundless  natural  resources,  in 
fields,  mines,  and  waters;  (2)  accumulations  of 
capital,  as  just  described,  which  allow  us  to  dis- 
count the  future  in  long-lived  enterprises ;  and  (3) 
abundant  human  labor.  Something,  however,  is 
still  lacking.  Leadership  is  as  essential  in  indus- 
try as  in  politics  or  anything  else.  Human  labor 

160 


LARGE  FORTUNES 

may  mean  nothing,  or  everything.  Therein  lies 
the  understanding  of  much  that  is  puzzling  in  our 
economic  problem.  Is  labor  all  of  a  kind  ?  Ob- 
viously not.  Taking  the  world  as  we  find  it — and 
not  as  we  may  see  it  in  dreams — as  there  are  all 
kinds  of  work  to  be  done  in  the  industrial  field,  so 
there  are  all  kinds  of  men  in  respect  of  intelligence, 
efficiency,  and  productive  capacity  to  perform 
these  tasks.  In  the  republic  of  work  there  is  no 
Declaration  of  Independence  which  pronounces 
"all  men  equal."  Before  the  law,  as  respects 
rights  and  liberty,  all  are,  of  course,  equal;  but 
in  the  practical  operations  of  industry  some  are 
privates,  some  are  captains,  and  some  are  great 
generals  and  geniuses.  As  an  army  needs  offi- 
cers, so  the  industrial  organization  needs  man- 
agers. In  fact,  whether  the  industrial  campaign 
ends  in  success  or  not,  for  high  or  low,  de- 
pends pre-eminently  upon  the  quality,  insight, 
and  guidance  of  the  leader  in  charge.  Good 
management  means  large  product;  poor  manage- 
ment means  ruin. 

The  human  element  in  production,  whether 
in  the  work  of  guidance  or  of  obedience,  va- 
ries as  widely  as  human  nature  and  capaci- 
ty. Tot  homines,  tot  capacitates.  For  services 

161 


LATTER-DAY  PROBLEMS 

to  production,  laborers  may  be  roughly  classified 
by  strata,  as  in  the  diagram  given  in  chapter  III,1 
the  unskilled  men  in  A,  the  slightly  skilled  in  B, 
the  highly  skilled  artisans  in  C  (such  as  the  loco- 
motive engineers),  the  highly  educated  profes- 
sional men  in  D  (such  as  civil  engineers,  electrical 
experts,  and  the  like),  and  finally  the  exceptionally 
capable  managers  in  E.  In  any  one  industry 
some  of  each  kind  are  required,  but  not  with  the 
same  intensity  of  demand;  nor  are  they  wanted 
in  the  same  relative  numbers  in  different  industries. 
The  unskilled  man  in  A  has  no  wide  choice  of 
occupations  that  he  can  enter;  he  can  do  only  the 
work  demanded  of  his  class.  And  yet,  as  com- 
pared with  the  demand  for  them,  the  number  of 
laborers  in  this  strata  is  enormously  large.  More- 
over, in  the  A  class  there  is  the  least  capacity  to 
set  the  future  gain  above  the  present  indulgence. 
Thus  we  find  increasing  numbers  in  the  very 
group  whose  activity  is  restricted  to  a  given  kind 
of  work.  Among  those  least  competent  to  add  to 
production,  there  is  the  greatest  supply  relatively 
to  the  demand  for  them.  Their  share  is  small, 
not  only  because  their  industrial  efficiency  is  small, 
but  because  the  supply  of  them  is  excessive. 

1  Page  77. 

162 


LARGE  FORTUNES 

As  we  go  up  in  the  scale  of  industrial  efficiency, 
we  find  the  numbers  in  the  strata  of  the  more 
highly  skilled  much  less,  while  the  intensity  of 
the  demand  for  them  increases.  Hence  wages 
increase  the  higher  we  go.  In  the  top  strata,  con- 
taining the  most  efficient  managers,  we  find  the 
highest  wages  paid  throughout  the  whole  indus- 
trial field.  When  a  blundering  or  incompetent 
manager  costs  a  company  millions  in  losses,  a 
fifty-thousand-dollar  man,  who  adds  millions  in 
gains,  is  a  cheap  laborer.  In  this  struggle  up  the 
scale  from  A  to  E  we  find  the  real  social  conflict. 
It  is  a  contest  between  different  kinds  of  laborers 
— a  contest  of  varying  grades  of  industrial  capacity 
with  each  other.  It  is  a  free-to-all  race,  in  which 
the  most  competent  win.  The  great  indus- 
trial manager,  being  the  most  highly  skilled 
laborer  obtains  enormous  wages  for  exceptional 
services  to  production.  This  exposition  gives  us, 
in  brief,  the  economic  reason  why,  in  a  coun- 
try [of  phenomenal  resources  like  the  United 
States,  men  of  exceptional  industrial  ability  can 
acquire  exceptionally  large  fortunes  legitimately ; 
although  it  does  not  imply  that  all  men  are 
honest  and  that  no  fortunes  have  been  made  in 
dishonest  ways. 

163 


LATTER-DAY  PROBLEMS 

Such  an  outcome  is  not  confined  to  one  field  of 
activity.  Great  capacity  which  has  shown  its 
effects  in  literature,  art,  music,  oratory,  or  state- 
craft will  none  the  less  come  to  the  fore  in  industry. 
In  this  country,  where  our  resources  are  almost 
untouched,  and  where  chances  are  open  to  all, 
great  managerial  power  can  no  more  be  prevented 
from  accumulating  large  fortunes  than  great  ora- 
tory or  great  learning  can  be  prevented  from  win- 
ning success  and  fame.  It  is  as  silly  to  carp  at 
great  industrial  capacity  as  it  would  be  to  carp  at 
great  literary  ability.  Great  wealth,  like  high 
office,  is  power;  we  cannot  object  to  the  one  any 
more  than  to  the  other.  As  a  race,  we  have  been 
working,  in  the  domains  of  law  and  government, 
for  centuries  not  to  abolish  high  office,  but  to 
regulate  it  by  proper  checks  and  balances  so  that 
it  may  work  for  the  good  of  the  many ;  and,  in  the 
domain  of  economics,  it  is  equally  our  task  not  to 
attack  large  fortunes  in  themselves,  but  intelli- 
gently and  without  hysterics  to  set  about  the  crea- 
tion of  checks  and  balances  by  which  great  power 
in  the  form  of  wealth  may  be  so  controlled  that  it 
will  do  no  injury  to  the  many. 

In  adjusting  our  actions  to  the  facts  in  connec- 
tion with  the  accumulation  of  vast  wealth,  we  must 

164 


LARGE  FORTUNES 

keep  one  other  point  clearly  in  mind.  In  the 
general  and  indiscriminate  condemnation  of  great 
gains  this  following  consideration  is  frequently 
overlooked.  Industrial  managers  could  not  them- 
selves legitimately  accumulate  large  fortunes,  un- 
less by  their  operations  they  had  in  some  way 
abridged  the  sacrifices  of  production,  or  given  the 
public  a  better  article  or  a  better  service,  or  one  at 
a  lower  cost,  or  had  in  one  way  or  another  created 
a  vast  new  wealth,  out  of  which  they  have  been 
able  to  take  only  a  part.  A  few  illustrations  of 
this  principle  may  not  be  amiss. 

In  south-eastern  Europe,  Baron  Hirsch  amassed 
a  princely  fortune  by  insight  into  the  means  of 
new  and  improved  transportation  for  the  region 
of  the  lower  Danube.  The  resources  of  inacces- 
sible districts  in  the  Balkan  States  were  as  if  they 
did  not  exist:  cut  off  from  markets,  there  was 
no  employment  of  capital,  and  laborers  lived  a 
pitifully  mean  existence.  With  the  vision  of 
a  prophet  this  man  of  exceptional  managerial 
power  wove  webs  of  railways  throughout  those 
districts  capable  of  improvement,  and  brought  a 
market  and  employment  to  these  men  in  skirts 
and  turbans  such  as  had  never  before  stimulated 
their  industry  or  rewarded  their  labor.  A  new 

165 


LATTER-DAY  PROBLEMS 

surplus  wealth  came  into  existence;  out  of  the 
carriage  of  the  new  goods  Baron  Hirsch  obtained 
a  profit  on  his  railways.  The  toll  he  took  from 
the  new  millions  made  up  a  large  reward  to  him, 
but  it  was  only  the  fraction  of  a  vastly  larger  gain 
which  he  gave  to  those  communities  by  his  judg- 
ment and  capacity.  And  it  may  be  added  here, 
by  way  of  parenthesis,  that  he  would  have  in- 
creased the  wealth  of  this  region  far  more  than  he 
did  if  he  had  not  been  hampered  at  every  turn  by 
the  ignorant  interference  of  governmental  control  of 
rates,  especially  in  connection  with  through  transit. 
Coming  nearer  home,  another  instance  can  be 
found  when  the  first  Vanderbilt,  at  a  time  when  his 
outlook  was  far  beyond  that  of  his  contemporaries, 
foresaw  the  possibilities  of  opening  up  the  empire 
between  the  Great  Lakes  and  the  Atlantic  sea- 
board. On  the  thin,  stony  soil  of  New  England 
farmers  were  growing  wheat  and  corn,  but  at  a 
high  cost  in  effort  and  outlay;  while  the  rich  loam 
of  the  prairies  from  Indiana  to  Dakota  was  as 
little  known  as  the  Soudan  of  to-day.  The  valley 
of  the  Genesee,  in  western  New  York — later 
known  as  a  fertile  wheat  region,  and  now  cele- 
brated for  its  dairy  products — was  then  scarcely 
touched  by  the  plough.  For  opening  up  the  un- 

166 


LARGE  FORTUNES 

counted  resources  of  this  splendid  region,  Mr. 
Vanderbilt  risked  all  the  capital  he  had,  or  all  he 
could  control,  in  a  scheme  to  connect  New  York 
with  Buffalo.  He  bought  short  railways  already 
built,  constructed  connecting  links,  until  the  line 
crept  up  the  Hudson  to  Albany,  thence  westward 
along  the  easy  grades  of  the  Mohawk,  past  the 
Genesee,  to  the  Great  Lakes.  What  was  the 
result?  He  made  possible  the  settlement  and 
cultivation  of  whole  States,  he  gave  an  outlet  to 
markets  for  the  products  of  field  and  mine,  not 
only  along  the  course  of  his  railway,  but  in  all  the 
territory  reached  by  the  Great  Lakes.  Immigrants 
and  capital  poured  in,  while  goods  moved  both 
in  and  out,  permitting  the  profitable  investment  of 
untold  millions  in  all  the  industries  of  this  vast  in- 
terior. And  the  day  laborer  in  New  England  could 
transport  his  sustenance  for  a  whole  year  from  the 
rich  prairies  to  his  place  of  work  for  the  price  of 
one  day's  toil.  If  Mr.  Vanderbilt  accumulated 
fifty  or  sixty  millions  of  dollars  by  this  great  labor- 
saving  machine,  it  was  possible  only  because  he 
had  enriched  the  country  a  thousandfold  more. 
The  penetration  which  saw  a  great  opportunity 
gave  him  a  profit  in  proportion  to  the  extent  of  the 
enterprise.  It  was  not  a  case  of  monopoly;  any 

167 


LATTER-DAY  PROBLEMS 

one  else,  equally  capable,  would  have  been  free 
to  do  the  same  thing.  The  truth  is,  his  kind  of 
insight  and  ability  was  rare — and  it  remains  rare 
to-day. 

Without  multiplying  instances,  it  is  perfectly 
possible  to  see  that  these  captains  of  industry 
may  accumulate  millions,  not  only  without  rob- 
bing others,  but  in  the  process  of  benefiting  others, 
especially  those  who  are  in  search  of  employment. 
Men  of  this  character  serve  precisely  the  same 
function  as  the  inventors  of  labor-saving  devices. 
When  Howe  invented  the  sewing-machine,  he 
abridged  human  effort  in  obtaining  clothing.  He 
secured  a  fortune  out  of  the  new  surplus  of  wealth 
made  possible  by  his  addition  to  the  efficiency  of 
the  human  race  in  its  productive  efforts.  The 
same  is  true  of  the  invention  and  manufacture 
of  harvesters  and  agricultural  implements.  The 
farmer  voluntarily  chooses  the  machine  because 
it  lowers  the  cost  of  getting  the  wheat  into  his 
bags.  If  it  had  not  been  a  gain  to  the  farmer,  the 
machine  would  not  have  been  introduced.  The 
profits  made  by  makers  of  such  devices,  therefore, 
are  not  stolen  from  the  farmer. 

If  it  be  said  that  these  gains  are  not  made  at 
the  expense  of  the  consumer,  but  at  the  expense 

168 


LARGE  FORTUNES 

of  the  laborer,  it  must  be  recalled  that  in  this  free 
land  it  is  open  to  any  laborer  to  get  the  high  re- 
turns of  managerial  capacity,  if  he  can  prove  his 
competency;  and  he  need  not  continue  to  receive 
low  wages  if  he  can  increase  his  industrial  effi- 
ciency in  the  processes  of  production. 

n 

It  is,  of  course,  perfectly  understood  how  un- 
popular such  exposition  as  this  which  has  been 
already  given  may  be.  Moreover,  it  is  likely  to 
be  said — even  though  there  is  not  a  word  of  truth 
in  it — that  these  utterances  have  been  influenced 
by  pressure  upon  academic  liberty.  In  spite  of 
the  evident  dangers  of  misrepresentation,  however, 
there  is  no  other  way  possible  than  to  put  forth 
the  truth  according  to  one's  convictions  and  in- 
vestigations. If  criticism  is  carping,  and  scant  of 
logic  and  impartiality,  its  day  will  not  be  long. 

While  one  must,  therefore,  set  forth  only  what 
appears  to  be  scientifically  sound,  and  that  which 
appears  to  be  true,  as  distinct  from  popular  prej- 
udice or  misconception  of  the  facts,  still,  no  one  can 
be  oblivious  to  other  sides  of  the  case  than  that 
presented  above.  Why  should  there  be  so  wide- 
spread a  conviction,  honestly  held,  that  the  rich 

169 


LATTER-DAY  PROBLEMS 

are  harpies  preying  upon  the  poor,  and  gaining 
large  fortunes  unrighteously?  Obviously,  in  re- 
plying to  such  a  question,  not  everything  involved 
in  it  can  be  here  treated ;  but  some  of  the  main  con- 
siderations may  be  touched  upon. 

In  the  first  place,  it  is  no  more  likely  to  be  true 
that  all  managers  are  good  and  just  than  that  all 
workmen  are  honest  and  faithful.  There  are, 
and  will  be,  good  and  bad  managers,  just  as  there 
are,  and  will  be,  good  and  bad  workmen.  The 
error  of  the  popular  prejudice  against  the  pos- 
sessors of  large  fortunes  consists  in  making  the 
line  between  the  good  and  the  bad  coincident 
with  the  line  between  the  successful  and  the  un- 
successful in  money-getting.  In  truth,  the  line 
between  the  good  and  the  bad  cuts  through  both 
classes.  It  is  as  foolish  to  suppose  that  all 
money-makers  are  wicked  as  to  suppose  that  all 
men  with  brown  eyes  are  wicked.  An  evil  man 
will  show  his  bad  qualities,  whether  rich  or  poor. 
If  a  manager  of  great  capacity  is  of  this  sort,  then 
when  he  comes  into  control  of  capital  he  may  un- 
scrupulously grind  his  workmen,  cheat  his  credi- 
tors, buy  franchises  by  bribing  city  councils,  cor- 
rupt legislatures — and  cynically  defy  the  out- 
raged public  opinion  of  the  community.  Such  a 

170 


LARGE  FORTUNES 

man  is  not  unknown  to  us.  He  is  to  honest  in- 
dustry what  the  grippe  is  to  sound  health — he 
weakens  the  whole  system.  By  unfair  methods, 
by  dishonesty,  by  bribery  and  corruption,  large 
fortunes,  just  as  high  office,  may  be  illegitimately 
accumulated.  A  man  may  thus  add  no  new 
wealth  to  the  community,  but  merely  transfer 
wrongly  to  himself  wealth  which  others  have  pro- 
duced. Because  of  such  gains,  however,  it  is  not 
a  mark  of  maturity  to  condemn  sweepingly  all 
gains.  We  must  discriminate;  and  we  must 
know  the  facts  before  we  pass  judgment. 

Discrimination,  also,  should  be  properly  exer- 
cised in  making  a  clear  distinction  between  the 
way  in  which  a  fortune  is  accumulated  and  the 
way  in  which  it  is  used  after  it  is  won.  The  one 
may  be  right,  the  other  may  be  wrong.  Great 
wealth  may  be  honestly  gained  by  adding  to  the 
efficiency  of  production;  and  then  an  unprin- 
cipled owner  of  this  new  wealth  may  put  the 
power  resident  therein  to  mean  or  vicious  uses. 
Many  of  us  can  recall  a  railway  magnate  of  un- 
savory reputation  who,  in  all  probability,  gained 
a  considerable  part  of  an  immense  fortune  quite 
legitimately  by  reason  of  his  remarkable  insight 
into  industrial  problems;  and  yet,  if  we  are  to 

171 


LATTER-DAY  PROBLEMS 

believe  the  evidence  of  the  press,  he  used  his  gains 
in  wrecking  railways — selling  the  stock  short, 
impoverishing  the  weaker  shareholders,  buying 
the  stock  for  a  song,  and  then  putting  up  the  price 
of  the  securities  again  by  restorative  management. 
Is  it  any  wonder,  therefore,  that  undiscriminating 
people  sweepingly  condemn  all  large  fortunes  as 
dangerous  to  the  commonweal?  Dishonorable 
use  of  wealth  is  probably  no  more  common  than 
dishonorable  conduct  in  public  office.  But,  while 
it  is  possible  for  large  fortunes  to  be  rightly  earned, 
no  one  wishes  to  defend  or  apologize  for  the  im- 
proper use  of  that  which  has  been  well  come  by. 

Best  of  all,  for  the  man  who  has  not  only  honor- 
ably won  his  wealth,  but  who  has  spent  it  honor- 
ably, we  have  good  ground  for  admiration  and 
high  acclaim.  When  a  certain  New  England 
youth  left  the  elm-shaded  streets  of  Danvers,  he 
was  poor  in  purse,  but  rich  in  high  purposes, 
kindly  sympathies,  and  an  untried  capacity  for 
accumulating  wealth.  He  has  been  dead  these 
many  years;  but  the  great  wealth  of  George  Pea- 
body  nourishes  the  literary  life  of  his  native  town 
with  books  and  libraries;  vast  accumulations  of 
scientific  material  relating  to  the  early  history  of 
this  continent,  placed  in  Cambridge  by  George 

172 


LARGE  FORTUNES 

Peabody's  munificence,  will  serve  thousands  of 
students  in  all  the  years  to  come;  and  year  after 
year,  to  the  present  day,  a  commission  of  the  best 
and  wisest  of  our  public  men  have  gathered  to  dis- 
tribute a  splendid  fund  devoted  by  this  rich  phi- 
lanthropist to  the  elevation  of  the  negro,  to  the 
growth  of  education  in  the  South,  and  to  the  se- 
curity of  our  institutions. 

While  such  lives  as  George  Peabody's  give  the 
lie  to  undiscriminating  condemnation  of  all  large 
fortunes,  yet  there  exists  a  condition  in  our  politi- 
cal development  which  may  justly  give  us  great 
concern.  Things  are  going  on  in  our  local  and 
national  councils  which  give  plausible  grounds 
to  the  agitators  who  speak  against  existing  insti- 
tutions with  curses  as  bitter  as  quinine.  To  buy 
the  easy  passage  of  legislation  from  a  "boss"  is  the 
common  method  of  business  men  who  look  for 
short  cuts  to  their  objective.  In  some  persons, 
who  control  legislative  votes,  resides  the  power  to 
blackmail  rich  corporations  by  rumors  of  exami- 
nation, to  furnish  favors,  and  to  exact  campaign 
contributions,  which  would  do  credit  to  a  Spanish 
governor  in  a  distant  colony.  Even  if  the  thing 
desired  is  something  quite  proper  and  necessary 
in  itself,  it  becomes  the  usual  thing,  to  save  time 

173 


LATTER-DAY  PROBLEMS 

and  annoyance,  to  hand  a  purse  to  an  attorney  of 
dubious  standing  and  instruct  him  to  secure  the 
passage  of  the  ordinance  or  bill.  More  than  that, 
the  belief  has  become  wide-spread  that  the  national 
councils  contain  men  who  are  the  representatives 
of  private  financial  interests,  and  that  remedial 
legislation  for  the  benefit  of  the  general  consumer 
is  blocked  by  the  long  purses  of  the  rich  for  the 
protection  of  their  private  interests.  The  bribing 
morals  of  such  members  of  the  rich  element  among 
us  are  largely  responsible  for  the  corrupt  munic- 
ipal council  and  the  venal  legislature.  Correct 
the  bribing  morals  of  those  who  possess  the  means 
to  bribe,  and  there  would  be  "nothing  in  it"  for 
the  debased  councilman  or  legislator. 

If  we  have  no  moral  responsibility  in  the  use 
of  wealth,  then  we  shall  have  abuses  arising  from 
the  disposal  of  wealth,  just  as  from  the  disposal 
of  power  in  any  other  form.  Millionaire  wealth, 
I  repeat,  is  millionaire  power.  The  right  or 
wrong  of  it  is  not  in  the  wealth  or  power  itself, 
but  in  the  controlling  spirit  behind  this  wealth. 
It  is  not  the  knife  of  the  assassin  we  detest,  but 
the  assassin  himself  who  wields  the  knife.  If  we 
insist  on  venting  our  displeasure  on  the  existing 
system  of  distribution,  by  all  means  let  us  direct 


LARGE  FORTUNES 

our  vituperation,  not  against  wealth,  but  against 
the  turpitude  which  makes  a  wrong  use  of  a  power 
that  has  endless  possibilities  for  good.  A  gun 
fired  against  a  brutal  foe  in  defence  of  family  and 
country  may  be  glorious;  but  the  same  gun  fired 
for  vanity  and  for  selfish  conquest  over  a  weak 
people  is  damnable. 

As  in  most  questions  which  are  complex,  we  need 
discrimination  and  knowledge  of  the  facts  before 
judgment  is  passed.  One  must  have  little  patience 
with  the  narrow-mindedness  which  energetically 
works  in  season  and  out  of  season  to  get  sweeping 
legislation  to  level  the  inequalities  of  wealth,  or  to 
prevent  the  existence  of  large  fortunes.  It  is  like 
establishing  ordinances  against  knives,  or  razors, 
because  some  one  may  make  bad  use  of  them. 
There  will  be  inequalities  of  wealth  just  as  long 
as  there  are  differing  industrial  capacities  in  men. 
It  would  be  as  futile  to  attempt  to  regulate  accu- 
mulations of  wealth  as  to  legislate  on  the  weather. 
The  extreme  bitterness  against  wealth,  although 
excited  by  the  abuses  of  large  fortunes,  is  to  some 
extent  made  up  of  envy.  It  is  like  the  "yawp"  of 
a  dog  running  alongside  an  express  train,  indig- 
nant that  it  cannot  run  as  fast  or  make  as  big  a 
noise  as  the  train. 

175 


LATTER-DAY  PROBLEMS 

Instead  of  destruction,  the  higher  way  always 
is  by  construction.  The  wrong  is  not  in  the  gun, 
but  in  the  man  who  wrongly  directs  the  gun. 
The  one  thing  that  we  can  all  do,  and  do  strenu- 
ously, is  to  work  altogether  for  a  higher  standard 
of  morals  and  character  in  the  person  who  controls 
the  power  of  wealth.  We  can  refuse  social  recog- 
nition, or  public  office,  and  the  esteem  of  his 
fellows,  to  the  debased  manager  of  power,  be  it 
power  in  the  form  of  wealth,  or  brains,  or  inherited 
prestige.  The  indictment  of  all  wealth  without 
discrimination  is  folly,  for  large  fortunes  may  be 
honorably  won  and  honorably  spent;  fortunes 
honorably  won  may  be  dishonorably  spent;  fort- 
unes dishonorably  won  may  be  honorably  spent; 
and  fortunes  may  be  dishonorably  won  and  dis- 
honorably spent.  Here  is  our  whole  subject  in 
a  nutshell. 


176 


CHAPTER  VII 
VALUATION  OF  RAILWAYS 


WHEN  boards  could  be  smoothed  only  by 
hand,  a  man  with  a  plane  might  finish, 
perhaps,  ten  boards  in  a  day.  As  soon  as  a  plan- 
ing-machine  was  invented,  a  man  with  such  a 
machine  might  finish,  perhaps,  500  in  a  day.  (i) 
If  the  inventor  owned  all  the  planing-machines, 
he  could  hire  them  out,  and  builders  would  pay 
him  a  return  something  between  the  cost  of 
smoothing  10  and  500  boards.  To  give  the  builder 
some  advantage  the  inventor  might  charge  for 
the  use  of  the  machine  the  cost  of  finishing  450 
boards;  thus  the  one  would  gain  40  over  the  old 
hand-system,  and  the  inventor  would  enjoy  a 
royalty  of  450.  The  latter,  if  the  price  of  finish- 
ing a  board  was  10  cents,  would  receive  $45  as 
rent  for  his  machine,  and  he  could  sell  it  at  a 
price  that  would  return  him  $45  a  day,  more  or 
less,  according  to  the  depreciation  of  the  machine. 

177 


LATTER-DAY  PROBLEMS 

That  is,  the  monopolized  machine  would  sell  at 
the  capitalized  value  of  its  earnings;  and  the  in- 
ventor could  retain  this  gain  only  because  he  had 
a  monopoly  over  the  machines  which  represented 
in  permanent  form  his  creative  and  managerial 
ability.  (2)  On  the  other  hand,  should  the  con- 
struction of  planing-machines  become  common 
property,  and  thus  be  obtained  by  any  one  at  the 
mere  expense  of  producing  them,  the  price  of  a 
machine  would  at  once  fall  to  the  sum  which 
would  cover  its  expenses  of  production.  Its  effi- 
ciency may  have  remained  as  great  as  ever,  but 
its  value,  when  freely  reproducible,  would  fall  to 
its  simple  cost  of  reproduction.  If  not  monopo- 
lized, this  price  under  ordinary  circumstances 
could  go  no  higher.  That  is,  supply  can  dominate 
utility  in  its  effect  on  price.  Thus  we  may  see 
that  a  valuation  based  on  a  capitalization  of  earn- 
ings is,  as  a  rule,  possible  only  under  more  or  less 
strict  monopoly  conditions. 

Such  a  method  of  valuation,  however,  has 
played  a  prominent  role  recently  in  the  purchase 
of  industrial  plants  by  combinations.  Mr.  Car- 
negie, for  instance,  created  during  many  years  of 
operation  a  steel  plant  at  Homestead.  When  the 
United  States  Steel  Corporation  was  forced  to  buy 

178 


VALUATION  OF  RAILWAYS 

him  out,  how  much  should  it  pay  for  the  plant? 
On  the  one  hand,  the  cost  of  reproducing  the  plant, 
its  machinery,  coke-supplies,  railways,  etc.,  might 
perhaps  be  $100,000,000.  That  sum  might  repre- 
sent the  actual  capital  invested.  Should  the  value 
of  a  plant  be  computed  as  equal  merely  to  the 
value  of  the  capital  put  into  it?  Certainly  not, 
unless,  as  in  our  former  illustration,  it  were  a 
freely  reproducible  article.  If  any  group  of  men 
on  the  street,  who  could  get  together  the  required 
capital,  could  build  and  conduct  a  mill  as  profit- 
ably as  Mr.  Carnegie's,  then  the  Homestead 
works  were  worth  in  the  market  only  the  cost  of 
reproduction.  A  higher  price  could  not  be  paid, 
because  a  similar  establishment  could  be  built  at 
once  at  the  price  of  construction.  On  the  other 
hand,  we  are  told  that  the  most  sagacious  business 
men  in  the  country  paid  Mr.  Carnegie  some 
$400,000,000,  or  even  more,  for  this  plant.  It  was 
also  shown  in  the  courts  that  the  earnings  in  some 
years  had  been  as  high  as  $40,000,000.  In  short, 
no  one  hesitated  to  fix  the  price  of  the  going  con- 
cern by  its  proven,  or  average,  earnings  in  a  period 
including  both  lean  and  fat  years.  A  capitaliza- 
tion of  earnings  was  the  method  adopted  for  ascer- 
taining the  selling  price  not  only  of  a  steel  plant, 

179 


LATTER-DAY  PROBLEMS 

but  of  countless  other  industrial  plants  in  the  days 
since  1897.  Why?  Because  Mr.  Carnegie's  mills 
were  not  freely  reproducible  articles.  They  were 
not  freely  reproducible,  because  similar  manage- 
rial ability  is  scarce.  Obviously,  their  earning 
power  was  due,  not  merely  to  the  actual  capital 
invested — for  capital  in  and  by  itself  does  not  pro- 
duce anything — but  to  the  energizing,  fertile,  de- 
vising, inventing,  directing,  and  crafty  mind  of  the 
manager  of  the  whole  institution.  His  organizing 
and  constructive  genius  formed  a  productive  ma- 
chine of  high  efficiency;  his  power  of  obtaining 
coke  and  ore;  his  knowledge  of  men  and  markets; 
the  men  of  inventive  genius,  like  William  Jones, 
whom  he  gathered  around  him;  his  insight  into 
politics  at  Harrisburg  and  Washington;  his  deal- 
ings with  transportation  companies — all  worked 
together  with  his  invested  capital  to  build  up  the 
annual  earnings.  In  the  price  paid  for  his  prop- 
erty was  a  large  sum  which  represented  the 
permanent  efficiency  of  the  machine  created  at 
Homestead.  It  was  a  case  of  a  natural  monopoly. 
It  was  open  to  other  men  to  do  the  same  thing; 
but  few  there  were  who  could  do  it  as  well.  A 
high  price,  therefore,  was  paid  for  a  natural  mon- 
opoly formed  by  a  creative  mind.  It  would  be 

180 


VALUATION  OF  RAILWAYS 

aside  from  the  point  to  pay  only  for  the  capital 
invested;  for  admittedly  capital  is  only  one  of 
the  factors  entering  into  the  production  of  things 
of  value. 

n 

The  question  as  to  what  is  an  equitable  basis 
of  valuation  has  been  discussed  in  connection 
with  other  than  industrial  plants.  Very  recently 
the  true  method  of  valuing  railways  has  been 
brought  forward,  not  only  as  a  means  of  control- 
ling rates  on  traffic  carried,  but  also  as  a  means 
of  regulating  the  amount  of  railway  securities 
issued,  and  to  afford  a  basis  of  taxation.  Two 
methods  of  valuation,  in  general,  have  been  pro- 
posed: (i)  a  commercial  valuation,  based  on 
earnings;  and  (2)  a  physical  valuation,  based  on 
an  inventory,  at  an  appraised  value  of  the  tangible 
property.  This,  in  effect,  is  but  an  application  of 
the  general  principles  previously  observed  in  re- 
gard to  planing-machines  and  industrial  plants. 
Thus  we  are  obliged  to  determine  the  sources  of  a 
railway's  earnings,  and  whether  it  is  a  monopoly 
or  a  freely  reproducible  article.  If  the  former, 
its  value  should  be  fixed  according  to  its  earnings ; 
if  the  latter,  according  to  its  cost  of  production. 

181 


LATTER-DAY  PROBLEMS 

Is  a  railway,  in  truth,  capable  of  reproduction 
by  any  group  of  men  who  can  control  merely  the 
capital  needed  to  create  its  visible  property — its 
cuts,  fills,  bridges,  road-bed,  stations,  rolling- 
stock,  wharves,  and  terminals?  If  one  had  the 
funds,  could  one  make  another  Pennsylvania 
Railroad  just  like  it?  Clearly  not.  Why?  To 
parallel  it  would  not  accomplish  the  task.  In 
fact,  the  actual  going  concern  is  a  complex,  not 
merely  of  tangible  forms  of  capital,  but  of  capital 
guided  and  shaped  by  men  who  "bore  with  a 
large  auger,"  and  who  have  created  an  individual 
machine  specially  adapted  for  transportation  in 
the  particular  region  and  cities  which  it  serves. 
It  is  profitable  precisely  because  it  is  different  from 
other  roads  differently  circumstanced.  Each  rail- 
way has  problems  of  its  own;  and  if  each  is  now 
fairly  well  established,  it  is  because  it  has  had  the 
services  of  men  capable  of  the  highest  order  of 
constructive  managing  ability.  A  successfully  or- 
ganized railway  is  as  much  the  result  of  efficient 
management  as  a  successful  newspaper  or  maga- 
zine. A  definite  persona  has  come  into  being, 
capable  of  continuing  usefulness  under  experi- 
enced guidance.  Such  an  organization  is  as  little 
capable  of  being  freely  reproduced  as  anything 

182 


VALUATION  OF  RAILWAYS 

under  a  natural  monopoly — like  a  great  book  or  a 
work  of  art. 

Nevertheless,  in  the  generally  critical  attitude 
of  to-day  toward  railways,  caused  no  doubt  by 
conspicuous  cases  of  indefensible  "high  finance," 
there  has  sprung  up  in  several  States,  as  well  as 
at  Washington,  the  intention  to  make  a  physical 
valuation  of  railways,  in  order  to  prevent  over- 
capitalization and  unduly  high  rates.  Behind 
this  intention  there  is  a  very  definite  idea  that  the 
earnings  of  railways  are  attributable  in  the  main 
to  the  capital  invested,  plus  the  income  derived 
from  privileges  given  the  roads  by  the  public. 
That  is,  earnings  are  analyzed  as  due  (i)  to  cap- 
ital investment,  and  (2)  to  franchises,  and  that 
the  earnings  from  the  latter  should  be  in  some  way 
— by  lowered  rates,  or  otherwise — returned  to  the 
public  who  gave  the  privileges.  Then,  obviously, 
the  railways  should  be  allowed,  on  general  prin- 
ciples, to  receive  a  reasonable  income  on  only  the 
capital  actually  invested.  This  proposal  has  been 
strenuously  opposed  by  the  railways,  generally  on 
the  ground  that  a  commercial  valuation  based 
upon  earnings  is  the  only  correct  method  of  valua- 
tion. To  this  it  is  answered  that  no  one  denies 
the  validity  of  determining  the  selling  price  of  a 

183 


LATTER-DAY  PROBLEMS 

railway  by  capitalizing  its  earnings;  but  it  is 
claimed  that  the  real  point  at  issue  is  to  be  found 
in  ruling  out  a  certain  part  of  the  earnings,  and 
thus  forcing  a  reduction  of  the  capitalization.  In 
brief,  it  is  urged  that  all  earnings  due  to  franchises 
should  be  eliminated,  that  they  should  not  be 
capitalized  or  represented  by  securities,  and,  con- 
sequently, that  there  is  no  justice  in  the  claim  that 
rates  should  be  maintained  at  a  level  high  enough 
to  pay  fixed  charges  and  dividends  on  a  capitaliza- 
tion which  includes  that  based  on  franchise  earn- 
ings. The  plan  to  make  a  physical  valuation  of 
a  railway,  therefore,  is  only  a  means  to  an  end, 
and  a  means  for  separating  the  earnings  due  solely 
to  capital  from  the  earnings  due  to  franchise 
privileges.  The  real  question  at  issue,  then, 
hinges  on  the  nature  of  these  privileges,  how  far 
they  give  special  gains  to  the  railways,  and  the 
right  to  such  income. 

m 

In  this  country,  a  railway  is  an  instrument  of 
transportation  which  can  be  constructed  freely  by 
an  outlay  of  private  capital.  There  is  no  mo- 
nopoly in  the  sense  that  only  one  road  can  be  built 
between  two  initial  points,  like  New  York  and 

184 


VALUATION  OF  RAILWAYS 

Chicago.  Several  lines  may  compete  for  traffic 
originating  in  these  two  cities,  but  each  one  would 
diverge  in  order  to  gain  the  advantage  from  local 
traffic  between  different  parts  of  the  country  lying 
between  the  two  points.  A  parallel  road  is  a 
"freak."  Thus,  so  far  as  mere  construction  is 
concerned,  a  railway  is  not  a  monopoly.  Yet,  once 
constructed,  it  cannot  be  bodily  removed,  and  no 
other  road  is  exactly  similar  to  it  in  work  and  re- 
turns. By  virtue  of  its  location  it  is  what  it  is, 
and  different  from  any  other  line.  In  one  sense, 
it  cannot  be  competed  with  in  certain  services. 
In  that  respect  it  has  a  monopoly  situation  by 
virtue  of  having  been  first  placed  where  it  is, 
since  people  and  industries  gather  at  that  place 
because  the  railway  is  there.  But  in  the  sense 
that  the  price  it  receives  for  its  service  is  open  to 
competition  in  many  ways,  it  has  no  monopoly. 

Apart  from  a  quasi-monopolistic  position  into 
which  it  grows  with  the  passage  of  time,  a  grant 
of  a  charter  by  the  public  to  a  railway  creates 
thereby  a  quasi-public  institution.  The  power  to 
condemn  real  estate  for  right  of  way,  and  the  priv- 
ilege of  conducting  a  transportation  business, 
which  by  the  nature  of  a  railway  is  locally  more 
or  less  monopolistic,  carries  with  it  an  obligation 

185 


LATTER-DAY  PROBLEMS 

to  give  equal  treatment  to  all  shippers.  This  is 
the  reason  why  railways  are  justly  supervised,  so 
that  the  rights  of  all — shippers  as  well  as  share- 
holders— shall  be  respected.  And,  since  the  cap- 
ital for  building  a  line  is  provided  by  private  enter- 
prise, there  is  no  valid  reason  for  governmental 
regulation  except  to  interfere  when  the  rights  of 
some  persons  are  restricted.  To  this,  it  should 
be  added  that — even  though  it  is  a  quasi-monopoly 
and  a  quasi-public  institution — the  investment  of 
private  capital  in  a  railway,  of  necessity,  implies 
the  taking  of  all  the  risks  involved  in  the  building 
up  of  a  transportation  instrument.  These  risks 
are  serious  and  many :  the  wisdom  of  making  large 
investments  in  tunnels,  wharves,  and  terminals; 
assuming  the  initial  expense  for  possible  future 
traffic  in  new  territory,  or  in  competing  for  traffic 
in  old  territory;  planning  for  access  to  new  and 
even  foreign  markets;  the  stimulation  of  local 
industries;  keeping  up  with  inventions  and  the 
progress  of  the  age,  and  yet  accurately  deciding 
which  project  will  be  a  commerical  success;  con- 
struction of  competing  or  parallel  lines ;  losses  by 
floods ;  depression  of  business,  which  reduces  traf- 
fic; failure  of  crops;  and  meeting  losses  due  to 
unexpected  and  ignorant  legislative  action. 

[86 


VALUATION  OF  RAILWAYS 

The  privilege  of  carrying  on  a  quasi-public 
business  of  transportation  for  profit  on  private 
capital  is  often  spoken  of  as  a  franchise.  Fran- 
chises are  regarded  as  including  "rights  of  way, 
privileges,  and  monopolies  of  location  and  opera- 
tion, which  have  been  conferred  by  public  grant."  * 
Now,  in  return  for  these  so-called  franchises, 
what  return  does  a  railway  make?  If  it  does  its 
obvious  duty,  it  provides  prompt  and  efficient 
transportation  service  at  reasonable  rates.3  If  it 
does  that,  it  does  what  the  community  expected 
to  get  in  return  for  the  privileges  granted  when  the 
charter  was  obtained.  So  far  as  the  efficiency  of 
the  railways  and  the  reasonableness  of  the  rates 
is  concerned,  it  is  generally  admitted  that,  on  the 
whole,  our  service  compares  favorably  with  that 
of  other  countries.  Almost  all  the  recent  irrita- 
tion as  to  railways  is  undoubtedly  due  to  the  be- 
lief that  discriminations  have  existed,  and  all  have 
not  been  treated  alike.  If  a  road  does  not  pro- 
vide efficient  service  at  a  reasonable  price,  the 
community  would  have  a  right  to  annul  the  charter, 

1 W.  Z.  Ripley,  "Railroad  Valuation,"  Political  Science  Quar- 
terly, December,  1907. 

*  Whether  the  rates  should  be  related  only  to  capital  investment 
or  not,  as  a  means  of  determining  whether  they  are  reasonable  or 
not,  is  discussed  later  on. 

I87 


LATTER-DAY  PROBLEMS 

and — provided  it  made  a  proper  adjustment  of 
existing  investments — give  it  to  some  one  else  who 
would. 

The  grant  of  privileges  to  a  railway  is  com- 
parable to  the  general  right  of  private  property  in 
land  granted  by  society  to  its  members.  Society 
does  this,  because  it  expects,  in  spite  of  minor  dis- 
advantages, to  gain  more  by  giving  men  rights  of 
private  property  than  it  would  by  not  doing  so. 
When  a  man  buys  land  for  a  farm,  he  expects  to 
enjoy  the  unearned  increment  arising  from  the 
growth  of  population  and  an  increased  demand 
for  his  products.  All  citizens  alike  have  that 
right  at  present.  The  proposal  to  take  away  this 
unearned  increment  from  the  land-owner  has 
never  been  given  serious  consideration,  both  be- 
cause of  difficulties  as  to  valuation,  and  because  it 
would  render  the  State  liable  for  losses  if  it  took 
away  gains.  Now,  how  does  this  general  attitude 
toward  private  property  apply  to  a  railway?  If 
it  is  expected  to  make  a  large  initial  outlay,  at  a 
risk  as  to  future  profit — and  not  all  railways  by 
any  means  are  financial  successes — shall  its  prop- 
erty be  deprived  of  those  gains  due  to  the  growth 
of  population  and  wealth  which  is  enjoyed  by  all 
other  owners  of  property?  What  is  there  in  the 

188 


VALUATION  OF  RAILWAYS 

nature  of  transportation  which  sets  it  apart  from 
other  industries  in  its  relation  to  property  rights? 
A  railway,  as  well  as  a  farmer,  invests  private 
capital  in  a  fixed  form  and  locality  in  order  to 
obtain  income.  So  far  as  either  of  these  does  not 
interfere  with  the  rights  of  others,  their  economic 
position  before  the  State  is  much  the  same.  The 
quasi-public  nature  of  a  railway  justifies  public 
regulation  to  insure  equal  treatment  for  all;  but 
it  is  also  true  that  if  a  farmer  trespasses  on  the 
public  roads,  or  keeps  a  nuisance,  he  would  like- 
wise be  subject  to  regulation.  Therefore,  keep- 
ing strictly  to  a  general  principle  of  justice,  is 
there  any  more  reason  for  taking  away  the  un- 
earned increment  from  a  railway  than  from  a 
farmer?  If  an  increase  of  numbers  and  wealth 
increases  the  \ncome,  and  so  the  value,  of  a  farmer's 
land,  would  it  be  just  to  make  an  inventory 
merely  of  the  capital  he  invested,  and  take  away 
from  him  all  his  gains  due  to  society  at  large? 
Beyond  proportional  taxation  on  an  increased 
valuation,  who  else  has  a  better  claim  to  the  un- 
earned increment?  And  this,  by  the  way,  says 
nothing  as  to  returns  due  to  the  farmer's  skill  and 
foresight.  In  truth,  are  not  millions  of  farmers 
to-day  moving  out  on  to  the  cheap  land  of  the 


LATTER-DAY  PROBLEMS 

West  and  South-west,  paying  low  prices  per  acre, 
solely  because  they  expect  to  enjoy  the  coming 
unearned  increment?  Is  this  proposal  to  take 
away  the  earnings  of  railways  due  to  franchises 
any  less  academic  than  the  whole  question  of  tax- 
ing out  of  existence  the  unearned  increment  from 
land?  If,  then,  it  is  an  impracticable  scheme  as 
regards  the  farmer  and  land-owners  in  general, 
why  should  it  be  enforced  upon  one  special  kind 
of  property  created  by  society  in  the  form  of  a 
railway  ? 

A  good  deal  of  the  hysterics  shown  in  connec- 
tion with  railways  seems  to  have  been  created  for 
effect  in  our  political  campaigns;  so  that,  discount- 
ing such  motives,  we  should  be  able  to  discuss  these 
matters  sanely.  So  far  as  they  affect  his  property, 
a  farmer  is  allowed  to  enjoy,  sell,  or  capitalize  the 
results  due  to  the  growth  of  the  country.  If  so, 
then  why  should  not  a  railway  have  an  equal 
right?  Yet  there  are  those  who  declare  that  the 
act  of  giving  a  charter  by  the  public  to  a  company 
to  build  a  railway  carries  with  it  the  exclusion  of 
all  claim  to  future  income  derived  from  the  growth 
of  the  country.  This  is  what  is  meant  by  saying 
that  earnings  from  franchises  should  be  elimi- 
nated in  arriving  at  the  true  basis  of  valuation  of 

190 


VALUATION  OF  RAILWAYS 

a  railway.1  Provided  that  a  railway  gives  prompt 
and  efficient  service,  at  reasonable  rates,  and  equal 
treatment  to  all,  it  has  made  the  returns  to  society 
that  were  expected  when  the  charter  was  granted ; 
and  for  the  rest  should  it  not  stand  on  the  same 
ground  as  other  property,  so  long  as  the  institu- 
tion of  private  property  constitutes  the  essential 
basis  of  our  economic  and  civil  existence  ?  When 
the  Pennsylvania  Railway  invests  $100,000,000  in 
tunnels  and  terminals  in  New  York,  it  takes  the 
same  risks  for  the  future — in  kind,  although  not 
in  degree — that  a  farmer  takes  when  he  builds  a 
large  new  barn.  Why  should  not  both  have  the 
unearned  increment? 

As  regards  the  growth  of  the  country,  more- 
over, it  is  well  known  that,  to  meet  the  new  de- 
mands for  traffic,  railways  had  to  be  practically 
rebuilt,  with  larger  and  very  expensive  terminals, 
heavier  rolling-stock,  longer  and  more  side-tracks, 

1  This  should  not  be  regarded  as  the  same  thing  as  letting  a 
piece  of  property  for  which  a  rental  is  paid.  In  a  municipality 
the  renting  of  the  space  in  the  streets  for  street  railways  is  to  be 
paid  for  by  the  renting  company  that  occupies  the  streets.  The 
streets  belong  to  the  municipality;  but  the  right  of  way  of  a 
railway  running  through  the  country  has  been  bought  from 
private  owners;  and  in  cases  of  condemnation,  even  then  the 
land  is  bought  from  private  owners,  although  the  price  is  legally 
adjusted. 


LATTER-DAY  PROBLEMS 

and  the  like.  In  short,  the  growth  of  the  country 
has,  of  necessity,  brought  about  an  enormous  in- 
crease of  the  capital  investment,  as  to  reasonable 
returns  on  which  there  is  no  dispute.  Now,  in 
general,  it  is  the  line  which  has  the  best  road-bed 
and  equipment  that  can  most  easily  obtain  the 
needed  capital  for  improvements,  thus  enabling  it 
to  reduce  grades  and  lower  rates  on  an  increasing 
density  of  traffic.  Thus  the  rates  happen  to  vary 
in  inverse  relation  to  the  valuation. 

rv 

Whether  we  have  in  mind  a  farm,  an  industry, 
or  a  railway,  there  is  another  source  of  earnings 
which  plays  a  very  important  part — one,  too, 
which  is  independent  of  franchises.  Managerial 
ability  is  often  the  chief  item  in  bringing  out  earn- 
ings from  any  kind  of  venture,  and  it  appears 
pre-eminently  in  the  earnings  of  railways.  There 
is  here  no  intention  of  overlooking  the  cheating 
and  unprincipled  operations  of  railway  manipu- 
lators. Their  work  stands  in  a  class  by  itself; 
just  as  highwaymen  are  to  be  put  in  a  class 
different  from  that  of  industrious  farmers.  The 
existence  of  sharks  in  railway  operations  does  not 
argue  the  non-existence  of  the  entrepreneurs  who 

192 


VALUATION  OF  RAILWAYS 

are  far-sighted,  square,  skilful,  judicious,  and  care- 
ful of  their  responsibilities  to  the  public.  The  lat- 
ter are  not  to  be  overlooked  because  of  the  greater 
notoriety  gained  by  rascals  in  their  own  profession. 
In  a  railway,  as  in  a  great  industrial  plant,  the 
organizing  ability  of  a  successful  manager  ha3 
often  justly  built  up  a  continuing  efficiency  in  his 
system  which  goes  on  when  he  leaves  it;  he  has 
introduced  new  methods  and  shown  the  best  way  to 
others;  and  the  results  of  his  good  management 
continue  to  add  to  the  income  in  the  future  because 
they  have  been  worked  out  to  suit  the  needs  and 
convenience  of  the  public  served  by  that  particular 
railway.  If  this  efficiency  created  by  a  manager  in 
an  organization  is  a  permanent  addition  to  the  util- 
ity of  the  transportation  instrument,  it  is  a  regular 
source  of  increased  earnings — the  same,  in  effect,  as 
an  addition  to  the  sources  of  income  arising  from 
any  other  admitted  factor  in  production.  Since 
these  results  of  management  have  become  a  con- 
stituent part  of  the  whole  transportation  machine, 
it  is  as  much  to  be  regarded  as  a  source  of  earnings 
as  anything  else,  such  as  capital.  For  capital  in 
and  by  itself  is  as  inert  without  skilful  management 
as  labor  would  be  without  capital.  Therefore,  if 
good  management  is  a  source  of  earnings,  the  valu- 


LATTER-DAY  PROBLEMS 

ation  based  on  such  income  should  as  legitimately 
be  bought  and  sold,  either  in  the  form  of  securities 
or  otherwise,  as  any  machine — like  a  harvester — 
which  results  from  the  brain  of  an  inventor. 
Consequently,  we  are  obliged  to  realize  that  there 
enters  in  an  important  manner  into  the  earnings 
of  a  railway  skill  of  management — a  factor  separate 
from,  and  in  addition  to,  the  operation  of  fran- 
chises; and  the  returns  from  this  managerial  func- 
tion are  distinct  from  those  chargeable  either  to 
franchises  or  to  capital  pure  and  simple.  And  if 
it  be  said  that  the  earnings  of  a  railway  depend 
upon  "good-will,"  "established  connections  and 
contracts,"  does  it  mean  anything  more  than  that 
they  are  due  to  managerial  skill? 

That  other  things  than  tangible  property  and 
franchises  seriously  influence  the  earnings  and  the 
valuation  of  a  railway  may  be  seen  by  reference 
to  well-known  facts.  One  railway,  with  efficient 
management  and  far-sightedness,  gains  large  re- 
turns, puts  part  of  the  earnings  into  improvements, 
and  can  carry  an  increased  capitalization  with  ease. 
Another  railway,  with  poor  management,  has  low 
returns,  and  can  scarcely  carry  its  original  capitali- 
zation. If  both  started  out  with  the  same  invest- 
ment, in  course  of  time  the  one  will  have  a  higher 

194 


VALUATION  OF  RAILWAYS 

physical  valuation  due  to  improvements  than  the 
other;  and  yet  both  roads,  competing  at  the  same 
terminals,  are  obliged  to  charge  the  same  rates. 
The  failure  to  introduce  all  the  necessary  factors 
affecting  earnings  evidently  accounts  for  the  theory 
which  supposes  that,  after  having  subtracted  the 
earnings  of  tangible  property,  or  invested  capital, 
from  total  earnings,  the  result  is  assignable  solely 
to  franchises.  One  omission,  at  least,  is  the  earn- 
ings of  management.  How  important  they  are 
may  be  noticed  in  the  particular  instance  of  the 
Atchison,  Topeka  and  Santa  Fe  Railway.  Several 
times  it  had  become  bankrupt  and  gone  through 
reorganizations.  Finally,  the  plan  was  adopted 
of  securing  the  services  of  four  of  the  best  railway 
men  to  be  found  in  the  country.  It  is  now  a  fact 
well  known  to  the  investing  world  that  the  Santa  F£ 
system,  under  the  leadership  of  Mr.  E.  P.  Ripley 
and  his  associates,  has  so  increased  its  permanent 
earning  power  that  the  valuation  of  the  prop- 
erty has  been  increased  by  hundreds  of  millions  of 
dollars.  Nor  can  this  be  ascribed  either  to  fran- 
chises or  to  the  unaided  growth  of  the  country; 
those  causes  were  at  work  when  the  road  was  pay- 
ing little  income.  The  real  cause  of  the  change 
was  the  policy  of  the  management  in  first  putting 

195 


LATTER-DAY  PROBLEMS 

the  line  in  good  physical  condition,  so  that  low 
rates  were  possible;  the  activity  of  the  officials 
in  building  up  industries  and  in  developing  the 
country  through  which  the  railway  passed;  and 
this  aided,  reflexively,  in  settling  up  new  territory. 
Then,  when  a  part  of  the  country  became  well 
occupied — as  in  Kansas — for  the  very  reason  that 
the  railway  was  rendering  prompt  and  efficient 
service  at  reasonable  rates,  all  kinds  of  industries 
ancillary  to  a  civilized  population  sprang  up  and 
increased  the  density  of  the  traffic.  If  transporta- 
tion had  been  confined  to  prairie  schooners,  such 
growth  would  have  been  impossible.  The  rail- 
way is  as  much  the  cause  of  the  growth  of  the 
country  as  the  growth  of  the  country  is  the  cause 
of  the  growth  of  traffic. 


In  the  proposal  to  make  a  valuation  of  railways 
for  the  purposes  of  preventing  over-capitalization, 
and  also  of  controlling  rates  so  that  dividends  can 
be  paid  only  on  invested  capital,  two  kinds  of 
valuation,  as  already  mentioned,  have  been  dis- 
cussed: (i)  a  commercial  valuation,  based  on 
earnings;  and  (2)  a  physical  valuation  based  on 
an  inventory  of  tangible  property. 

196 


VALUATION  OF  RAILWAYS 

In  respect  to  the  commercial  valuation,  made 
in  1904  by  the  Bureau  of  the  Census,1  net  earn- 
ings (gross  earnings  minus  operating  expenses) 
were  used  as  a  basis  of  capitalization.  The  rate 
of  capitalization  was  obtained  by  dividing  the 
corporate  net  income  by  the  aggregate  value 
of  corporate  securities.  The  commercial  valua- 
tion is  a  market  estimate  which  takes  into  con- 
sideration the  expectation  of  income  arising  from 
the  use  of  the  property  and  its  strategic  sig- 
nificance; the  growth  of  the  country;  restrict- 
ive legislation;  potential  competition  by  rail  and 
waterways,  and  investment  demand.  Since  net 
earnings  are  directly  dependent  on  rates,  and 
the  valuation  depends  on  net  earnings,  obvi- 
ously such  a  valuation  could  not  be  used  as  a 
means  of  deciding  upon  the  rates  charged.  The 
proposals  recently  put  forward  reject  commer- 
cial valuation  because  it  includes  sources  of 
earnings  from  franchises,  and  not  merely  those 
from  the  capital  invested  in  transportation.  That 
is,  this  method  of  valuation  is  rejected  because 
it  does  not  conform  to  the  assumption  that  a  rail- 

1  Bulletin  21,  Department  of  Commerce  and  Labor,  "Com- 
mercial Valuation  of  Railway  Operating  Property  in  the  United 
States:  1904." 

197 


LATTER-DAY  PROBLEMS 

way  should  not  retain  earnings  derived  from 
so-called  franchises,  the  growth  of  the  country, 
and  the  like. 

On  the  other  hand,  a  physical  valuation  is  de- 
clared to  be  a  means  of  governing  the  rates  charged. 
Omitting  franchises,  the  value  of  each  form  of 
railway  property  is  estimated  according  to  its  cost 
and  its  length  of  life,  and  an  inventory  is  made  of 
the  tangible  railway  investment  in  real  estate, 
cuts,  fills,  bridges,  ferry-boats,  wharves,  terminals, 
stations,  rails,  ties,  poles,  rolling-stock,  and  the 
like.  Hence,  the  new  policy  which  seems  to  have 
been  supported  by  President  Roosevelt  proposes, 
if  we  understand  it  rightly,  to  exclude  all  factors 
in  creating  earnings  except  capital.  In  the  first 
place,  such  a  method  excludes  from  railway 
property  the  gains  from  the  growth  of  the  country. 
It  is  the  theory  of  Henry  George  applied  to  rail- 
ways only,  although  not  applied  to  other  owners 
of  property.  In  the  second  place,  it  excludes  the 
earnings  due  to  managerial  skill.  In  the  third 
place,  such  a  valuation  in  fact  seems  to  have  no 
direct  relation  to  rates,  for  the  very  good  reason 
that  the  capital  is  not  the  sole  source  of  earnings. 
Finally,  the  attempt  to  trace  the  value  of  an  article, 
like  a  railway,  solely  to  one  factor  in  production, 


VALUATION  OF  RAILWAYS 

separate  from  others,  is  an  example  of  question- 
able economic  reasoning.  It  is  impossible  to 
separate  the  results  in  a  finished  product  due  to 
distinct  factors,  like  labor  or  capital,  which  are 
both  necessary  to  the  output.  In  a  coat  made 
jointly  by  a  man  and  a  sewing-machine,  it  is  im- 
possible to  draw  a  line  across  it  and  say  that  so 
much  was  due  to  the  man  and  so  much  to  the 
capital  invested  in  the  machine.  The  value  of  a 
finished  article  is  due  to  the  operation  of  all  the 
factors  necessary  to  production  working  together. 
This  gives  the  ground  for  claiming  that  a  car,  a 
locomotive,  or  a  piece  of  track  has  in  and  for  it- 
self little  or  no  value  in  isolation,  and  that  their 
value  arises  from  joint  use  in  a  complicated  carry- 
ing instrument. 

These  objections  make  clear  the  reason  why 
the  opponents  of  a  physical  valuation  are  able  to 
show  in  ordinary  railway  practice  such  evident 
independence  of  rates  from  such  a  valuation. 
For  instance,  it  is  well  known  that  the  rate  on 
wheat  from  Dakota  must  be  low  enough  to  cause 
it  to  move  to  the  central  market;  in  other  words, 
the  price  of  wheat  in  Liverpool  has  more  influence 
upon  the  rate  than  the  amount  of  the  capitaliza- 
tion. Moreover,  wherever  there  is  competition  of 

199 


LATTER-DAY  PROBLEMS 

goods  with  goods,  or  competition  of  carrying  com- 
panies by  rail  or  water  with  each  other,  the  physical 
valuation  has  no  effect  on  rates.  Quite  irrespec- 
tive of  capitalization,  the  railways  eagerly  compete 
for  traffic.  Indeed,  it  is  the  insolvent  roads  which 
offer  to  carry  freight  at  the  lowest  rates;  and  the 
well-managed  road  must  meet  this  cut-throat  com- 
petition without  regard  to  its  invested  capital. 
Without  doubt,  all  the  recent  exasperation  against 
discriminations  arises  from  the  bitterness  of  the 
struggle  to  get  traffic,  wholly  without  any  connec- 
tion between  the  physical  valuations  of  the  rival 
roads.  Consequently,  it  is  clear  why  Hon.  Mar- 
tin A.  Knapp,  Chairman  of  the  Interstate  Com- 
merce Commission,  testified  before  the  Industrial 
Commission  that  he  had  not  known  an  instance 
in  which  rates  seemed  much  to  depend  upon  the 
capitalization  of  a  road. 

The  physical  valuation  is  an  outcome  of  many 
elements  which  are  wholly  unconnected  with  high 
or  low  rates.  The  actual  capital  invested  to  ac- 
complish a  possible  haul  of  100  miles  varies  with 
the  conditions  of  nature,  or  with  the  soil  and  cli- 
mate of  the  environment.  The  existence  of  snow, 
ice,  mountains,  deep  rivers,  and  the  like,  might 
cause  an  expense  of  $100,000  a  mile,  as  compared 

200 


VALUATION  OF  RAILWAYS 

with  an  expense  to  produce  the  same  haul  in  a 
level  and  temperate  region  of  only  $15,000  a  mile. 
In  the  former  case  the  physical  valuation  would 
be  high,  while  in  the  latter  case  it  would  be  low; 
and  yet  the  former  might  not  begin  to  earn  as 
much  as  the  latter.  In  fact,  both  roads  would 
probably  charge  the  same  rates  if  in  a  competitive 
territory.  The  one  may  be  a  more  valuable  road 
than  the  other  because  of  the  density  of  traffic  and 
obtain  larger  earnings  quite  irrespective  of  its 
lower  physical  valuation.  Certainly,  there  are  so 
many  instances  in  which  the  physical  valuation 
can  have  no  relation  to  rates  that  it  can  hardly  be 
seriously  used  as  a  means  of  regulating  such  rates. 
The  conditions  which  work  upon  rates  are  many 
and  diverse,  such  as  activity  or  depression  of 
trade;  the  competition  of  goods  with  goods; 
the  competition  in  international  markets;  the 
probability  of  obtaining  future  traffic  by  opening 
up  new  districts;  the  rivalry  of  different  cities 
and  interests.  In  many  cases  the  rate  is  fixed  for 
the  railway  by  conditions  beyond  its  control  and 
which  it  has  no  option  but  to  accept.  For  example, 
lumber  from  the  Pacific  States  must  be  given  a 
rate  to  Chicago  low  enough  to  enable  it  to  com- 
pete with  lumber  from  near-by  States;  otherwise 

201 


LATTER-DAY  PROBLEMS 

the  traffic  would  not  be  moved.  This  is  one  case 
in  which  the  railway  can  charge  only  what  the 
traffic  will  bear. 

The  railway  opponents  of  a  physical  valuation 
are  able  to  point  out1  that  a  small  railroad  in 
Pennsylvania  earned  $25,000  in  1905,  but  in  1906, 
because  of  the  building  of  a  parallel  road,  it 
showed  a  loss  of  $10,000.  In  another  instance, 
the  Cincinnati,  Lebanon  and  Northern  Railway 
in  the  suburbs  of  Cincinnati  earned  nothing;  but 
after  being  sold  to  the  Pennsylvania  Company  it 
was  placed  on  a  dividend-paying  basis. 

As  regards  over-capitalization,  the  case  is 
closely  connected  with  that  of  rates  already  dis- 
cussed. Sometimes,  as  in  the  plundering  of  the 
Chicago  and  Alton,  it  is  believed  that  a  higher 
capitalization  will  be  a  reason  for  high  rates; 
but  this  is  seldom  the  case  in  practice.  The  over- 
capitalization of  railways  is  chiefly  a  matter  con- 
cerning the  railway  and  the  investor,  and  has 
little  to  do  with  rates.  Since  to  the  investor — 
and,  in  the  case  of  bankruptcy,  to  the  customer  of 
the  railway — it  is  a  danger  to  have  his  securities 
reduced  in  value  by  over-capitalization,  the  wrong 

*I.  L.  Lee,  "Railroad  Valuation,"  Bankers'  Magazine,  July, 
1907. 

2O2 


VALUATION  OF  RAILWAYS 

should  be  avoided  by  more  direct  and  efficient 
means  than  by  a  resort  to  a  dubious  remedy  like 
physical  valuation.  Such  a  policy  stands  out  in 
bold  contrast  with  that  of  Governor  Hughes,  who 
has  met  the  evil  of  over-capitalization  in  the  State 
of  New  York  by  requiring  the  issue  of  new  se- 
curities to  be  approved  by  a  Board  of  Public 
Utilities.  This  is  a  more  rational  and  practicable 
method  than  forbidding  the  issue  of  securities  on 
the  ground  of  a  physical  valuation. 

The  relation  of  the  question  of  valuation  of  rail- 
ways to  taxation  is  a  separate  question  into  which 
we  need  not  enter  here.  Everything  depends 
upon  the  laws  of  the  separate  States.  If  they  tax 
all  property  upon  the  basis  of  the  market  value  of 
its  tangible  forms,  then  railways  should  be  taxed 
upon  the  same  appraisal.  On  the  other  hand, 
unless  other  going  concerns  are  taxed  upon  a 
valuation  based  upon  earnings,  railways  should 
not  be.  Equality  of  treatment  is  the  only  rule. 

In  conclusion,  we  may  recall  that  a  freely  re- 
producible article,  like  a  hammer  or  a  plane, 
would  have  its  value  limited  by  its  expense  of 
reproduction.  Obviously,  a  railway  in  a  certain 
place  is  not  freely  reproducible  by  other  persons 
than  the  owners,  and  hence  its  value  could  not 

203 


LATTER-DAY  PROBLEMS 

properly  be  based  on  its  mere  cost  of  reproduction. 
But  we  also  saw  that  a  monopolized  plant,  prac- 
tically incapable  of  reproduction  as  it  stands, 
would  have  its  value  determined  by  its  earnings. 
To  the  extent  that  a  railway  is  a  monopoly,  its 
commercial  valuation  will  be  based  on  its  earn- 
ings. But  a  physical  valuation  overlooks  sources 
of  earnings  properly  belonging  to  a  transportation 
company. 


204 


CHAPTER  VIII 


SOMETIMES  our  legislation  falls  into  the 
hands  of  those  politicians  who  confessedly 
pay  no  attention  to  the  work  of  experts.  The 
existence  of  complicated  monetary  and  banking 
problems,  understood  by  only  a  few,  furnishes  the 
opportunity  for  professional  politicians  to  bring 
forward  measures  which  may  appeal  to  the  private 
interests  of  one  class  as  against  another,  but  which 
show  utter  want  of  analysis  and  an  ignorance  of 
fundamental  principles.  For  this  reason  legisla- 
tion goes  by  jerks,  now  bad,  now  good,  accordingly 
as  supposed  public  opinion  favors  the  one  or  the 
other.  Although  we  have  many  serious-minded 
statesmen,  still  a  measure  is  not  infrequently  judged 
by  its  power  to  gain  votes  for  the  party  in  power  in 
the  next  election.  Consequently,  the  candidate  for 
office  is  eagerly  searching  the  field  for  schemes  which 
can  be  regarded  as  personal  belongings,  and  which 

205 


LATTER-DAY  PROBLEMS 

will  appeal  to  uninformed  masses  quite  independ- 
ent of  their  true  ethical  or  monetary  quality. 

Of  such  a  character  was  the  "rag  baby"  of 
greenback  days,  or  the  free  coinage  of  silver  of 
more  recent  memory;  and  the  last  member  to  be 
added  to  this  motley  collection  is  the  guaranty  of 
bank  deposits.  Its  appearance  soon  after  the 
financial  crisis  of  1907,  followed  the  usual  se- 
quence of  freak  schemes  in  the  wake  of  a  business 
disturbance.  It  finds  honest  supporters,  not  only 
from  those  who  were  injured  by  the  inability  to 
withdraw  deposits  in  the  days  of  the  panic,  but 
also  from  those  who  believe  they  have  found  in  it 
a  means  of  preventing  panics.  Superficial  think- 
ing as  to  panics,  and  little  understanding  of  the 
actual  operations  of  banks,  have  provided  a  soil 
in  which  the  proposal  for  a  guaranty  of  bank  de- 
posits may  take  quick  root.  In  the  interests  of  a 
sound  basis  for  our  monetary  and  banking  institu- 
tions, it  is  well  worth  the  while  to  give  a  searching 
examination  to  a  scheme  which  has  been  proposed 
for  the  National  Banks,  and  which  is  quite  certain 
to  become  a  law  in  some  of  our  States. 

The  purpose  of  the  scheme  is  to  distribute  the 
losses  to  depositors  arising  from  bank  failures 
among  a  large  number  of  banks,  instead  of  allow- 

206 


GUARANTY  OF  BANK  DEPOSITS 

ing  them  to  fall  on  the  innocent  depositors  who 
were  not  responsible  for  them.  To  this  end  it  is 
proposed  to  levy  a  tax  on  the  bankers  to  create  a 
fund  which,  in  charge  of  the  National  Treasury, 
shall  be  used  to  pay  off  at  once  the  claims  of  de- 
positors in  insolvent  banks.  Some  advocate  the 
guaranty  of  the  Government,  others  lay  the  whole 
burden  on  the  banks,  aided,  perhaps,  by  an  initial 
grant  from  the  Government.  There  is,  however, 
no  agreement  as  to  the  actual  working  of  the  plan : 
(i)  Some  insist  that  its  essential  value  lies  in  sav- 
ing the  depositor  from  waiting  for  his  funds  until 
the  liquidation  of  the  bank's  assets;  while  (2) 
others  think  it  is  only  to  assure  the  depositor 
against  ultimate  loss,  in  case  the  assets  are  insuffi- 
cient in  the  last  resort.  There  is  a  difference  be- 
tween these  two  objects:  the  former  provides  for 
immediate,  the  latter  for  ultimate,  redemption  of 
deposits.  Arguments  for  the  one  would  not  apply 
to  the  other.  At  first,  the  benefit  was  supposed  to 
centre  about  the  ability  of  the  depositor  in  the 
failed  bank  to  cash  his  claim  at  the  very  time  when 
emergency  conditions  were  pressing  upon  him 
dangerously.  Hence,  he  would  not  be  crippled 
by  loss  of  his  means  in  a  time  when  he  must  meet 
maturing  obligations.  This  view,  however,  seems 

207 


LATTER-DAY  PROBLEMS 

to  have  been  abandoned  as  untenable,  because  it 
was  quickly  pointed  out  that  in  the  panic  of  1907, 
deposits  of  more  than  $100,000,000  were  tied  up; 
and  to  pay  off  this  sum  on  demand  would  require 
an  accumulated  guaranty  fund  much  larger  than 
that  mentioned  by  any  of  its  advocates.  The 
Fowler  bill  evidently  assumed  that  $25,000,000 
would  be  enough,  while  elsewhere  $50,000,000  was 
thought  sufficient.  Therefore,  if  the  fund  is  in- 
tended only  for  the  ultimate  redemption  of  de- 
positors' claims,  it  will  not  prove  of  much  ad- 
vantage to  the  man  in  the  hour  of  panic.  The 
panic  and  the  vital  need  will  be  long  gone  by 
before  the  claim  is  realized  upon. 

In  proposing  to  guarantee  depositors  in  general, 
there  is  an  obvious  lack  of  discrimination  in  fail- 
ing to  distinguish  between  depositors  in  savings 
banks,  whose  assets  must  necessarily  be  given  an 
investment  character,  and  depositors  engaged  in 
active  business,  who  have  checking  accounts  at 
commercial  banks,  which  must  always  keep  assets 
in  cash  sufficient  to  meet  normal  demand  require- 
ments. For  this  first  class,  savings  banks  under 
the  laws  of  the  various  States  are  created ;  and,  of 
course,  not  all  States  have  been  careful  in  provid- 
ing safety  for  such  depositors.  These  small  de- 

208 


GUARANTY  OF  BANK  DEPOSITS 

positors  are  the  ones  usually  referred  to  when 
pictures  are  drawn  of  the  misery  entailed  upon  per- 
sons who  could  have  had  no  means  of  deciding 
whether  one  bank  was  safer  than  another.  The 
protection  for  depositors  in  savings  banks  (or 
small  private  banks)  is  a  wholly  different  problem 
from  that  dealing  with  commercial  banks. 

It  is  for  this  first  class  that  Government  postal 
banks  are  suggested  as  offering  absolute  safety. 
Apart  from  the  inevitable  difficulties  arising  from 
the  investment  of  hundreds  of  millions  of  dollars 
by  Government  officials,  and  the  selection  of  se- 
curities— very  grave  difficulties — there  can  be  no 
doubt  as  to  the  safety  provided  for  all  depositors 
who  would  be  thought  incapable  of  intelligent 
choice  of  a  bank  in  which  to  make  time  deposits. 
Therefore,  a  Government  system,  if  adopted,  would 
remove  much  of  the  sentiment  manufactured  for 
consumption  among  the  small  depositors  of  the 
country  in  favor  of  the  insurance  of  bank  deposits. 
Moreover,  by  caring  for  this  class  of  persons,  who 
might  be  victimized  by  unprincipled  bankers,  the 
case  for  the  guaranty  of  deposits  in  commercial 
banks  which  are  left  there  by  active  and  keen 
business  men — who,  moreover,  usually  deposit 
where  they  can  also  get  loans — can  be  better 

209 


LATTER-DAY  PROBLEMS 

treated  by  itself.  Nor  would  the  establishment 
of  a  Government  savings  system,  in  my  judgment, 
have  any  appreciable  effect  on  the  sums  left  with 
the  commercial  banks. 

The  real  question,  therefore,  has  to  do  with 
commercial  banks,  such  as  our  national  banks, 
and  some  of  those  created  by  the  States;  for  the 
trust  companies  and  State  banks,  while  carrying 
on  savings  departments,  actively  strive  for  the 
business  of  commercial  banks,  and  cannot  by  any 
means  be  ignored.  Yet,  in  the  main,  the  national 
banks  must  receive  our  greatest  attention.  In 
fact,  because  the  national  banks  issue  notes,  the 
insurance  of  these  notes  by  a  guaranty  fund,  pro- 
viding for  their  immediate  redemption,  has  been 
generally  admitted  as  desirable  and  feasible;  al- 
though their  ultimate  redemption  must  be  secured 
by  a  first  lien  on  assets  or  by  the  deposit  of  bonds. 
If,  then,  the  insurance  of  the  note-holder  is  regarded 
as  necessary,  why  not  extend  the  same  idea  to  the 

depositor? 

n 

There  is,  however,  a  wide  difference  in  the  posi- 
tion of  the  note-holder  and  the  depositor.  When 
a  demand  liability  of  a  bank,  in  the  form  of  a  note, 
comes  to  be  used  as  money,  and  is  passed  from 

210 


GUARANTY  OF  BANK  DEPOSITS 

hand  to  hand  by  buyers  and  sellers  who  have  no 
knowledge  whatever  of  the  standing  of  the  issuing 
bank,  it  must  have  universal  acceptability.  It 
should  be  no  more  necessary  for  each  receiver  of 
the  note  to  stop  and  ascertain  the  solvency  of  the 
issuer  than  it  should  be  necessary  for  the  receiver 
of  a  gold  coin  to  stop  to  test  and  weigh  the  fineness 
of  the  metal  contained  in  it.  It  is  not  in  the  in- 
terest of  the  bank,  but  in  the  interest  of  the  busy 
public,  that  protection  is  thrown  around  the  issue 
of  notes.  In  its  work  as  a  medium  of  exchange 
the  note  often  goes  forth  to  a  great  distance  from 
its  place  of  issue,  and  often  remains  in  circulation 
for  a  long  period  before  being  returned  for  redemp- 
tion. It  is  quite  otherwise  with  the  deposit. 
While  the  note  performs  a  general  and  social  func- 
tion, the  deposit  arises  solely  from  a  personal  and 
voluntary  act.  Deposits  can  never  possess  such 
a  universal  and  general  currency,  because  each 
particular  check  must  always  submit  to  proof  of  the 
existence  of  funds  sufficient  to  meet  the  order. 
The  note-holder  is  usually  an  involuntary,  and  the 
depositor  a  voluntary,  creditor  of  the  bank.  The 
use  of  a  deposit  always  implies  recourse  to  a  bank 
in  order  to  give  it  effect  in  payment;  while  a  note 
requires  no  proof,  no  indorsement,  no  identifica- 

211 


LATTER-DAY  PROBLEMS 

tion  in  establishing  its  right  to  move  in  the  world 
of  exchange.  The  depositor  selects  his  own  bank 
and  takes  the  risks  implied  in  a  voluntary  choice, 
thus  becoming  responsible  for  his  act,  just  as  any 
one  does  who  gives  credit  to  a  buyer  or  lets  a 
house.  Consequently,  the  reasons  for  a  guaranty 
of  the  notes  are  obvious;  while  they  would  have  no 
application  to  the  guaranty  of  deposits.  If  it  be 
said  that  depositors  are  often  ignorant  of  the 
soundness  of  one  bank  as  compared  with  another, 
it  may  be  answered  that  such  an  excuse  might  be 
admitted  for  the  class  of  small  savings-bank  de- 
positors, but  not  for  the  ordinary  man  of  business 
who  deals  with  a  commercial  bank.  There  are 
abundant  means  of  finding  out  the  standing  of 
banks  in  any  city.  Or,  if  it  be  said  that  no  de- 
positor, not  a  director,  knows  what  is  going  on  on 
the  inside  of  a  bank,  so  it  might  be  said  that  a 
seller  of  goods  on  credit  does  not  know  what  the 
distant  buyer  is  doing  with  his  purchased  goods, 
for  which  he  has  not  yet  paid. 

in 

A  depositor  is,  of  course,  a  creditor  of  a  bank; 
that  is,  the  relation  of  a  depositor  to  a  bank  is  only 
one  of  many  other  relations  existing  between  cred- 

212 


GUARANTY  OF  BANK  DEPOSITS 

itor  and  debtor.  Is  there  anything  peculiar  in  the 
case  of  the  depositor  which  sets  him  apart  from 
all  other  creditors,  who  have  voluntarily  entered 
into  a  creditor  relation,  and  which  entitles  him 
alone  to  protection  against  the  consequences  of  his 
own  acts  ?  If  one  sort  of  creditor  should  be  insured 
against  the  usual  mischances  of  business,  why 
should  we  not  insure  all?  Why  discriminate  in 
favor  of  him  who  is  rich  enough  to  have  a  bank 
deposit?  A  humble  washerwoman  who  often 
has  outstanding  debts  which  she  cannot  collect 
ought  to  be  insured  against  loss  as  well  as  a  de- 
positor; she  has  little  means  of  knowing,  except  by 
bitter  experience,  whom  to  trust.  And  the  same 
might  be  said  of  the  cobbler,  the  milkman,  the 
grocer,  the  doctor,  the  merchant,  or  the  large  whole- 
sale seller  of  dry-goods,  or  the  seller  of  any  other 
article;  for  they  have  accounts  against  others  for 
which  they  need  the  collections  as  well  as  the 
depositor  in  a  bank — perhaps  more.  Why  this 
sudden  access  of  interest  in  the  creditors,  when  in 
the  silver  agitation  every  true  patriot's  heart  was 
burning  with  zeal  to  help  out  the  poor  debtor? 
Has  the  politician  exhausted  the  possibilities  of 
sympathy  in  the  debtor,  and  wishes  to  try  new 
pastures?  Obviously,  the  proposal  to  insure  de- 

213 


LATTER-DAY  PROBLEMS 

positors  as  an  application  of  a  general  principle 
of  insuring  all  creditors  is  childish  and  has  been 
born  in  the  mind  of  a  man  who  does  not  think  of 
things  beyond  his  own  nose. 

Pathetic  pictures  have  been  drawn  of  the  misery 
created  by  the  failure  of  a  private  State  bank  in 
Chicago,  the  Milwaukee  Avenue  Bank:  how 
innocent  men  and  women  lost  a  life's  savings; 
how  foreigners  saw  their  fortunes  disappear  be- 
fore they  had  become  settled  in  the  new  land ;  how 
small  dealers  were  ruined;  how  some  became  in- 
sane and  others  committed  suicide.  Then,  it  was 
added,  almost  the  whole  of  the  deposits  were  in  the 
end  paid  out  of  the  assets  by  the  receiver.  Hence, 
if  the  deposits  had  been  guaranteed,  all  this  misery 
would  have  been  saved.  Now  no  one  would 
depreciate  the  frightful  results  of  this  unpardon- 
able wrong-doing;  but  is  this  the  only  kind  of 
misery  to  be  cared  for?  And  shall  the  State  con- 
sciously engage  to  care  for  all  such  cases  arising 
from  accident  or  fraud?  Let  us  turn  from  the 
picture  just  given  to  another.  An  honest  and  suc- 
cessful dealer  was  selling  goods  to  Southern  buy- 
ers before  the  Civil  War.  On  the  breaking  out  of 
the  conflict  he  found  all  his  outstanding  debts  un- 
collectible; he  was  ruined;  his  children  had  even 

214 


GUARANTY  OF  BANK  DEPOSITS 

to  be  withdrawn  from  school  and  set  to  work  for 
bread;  and  this  man,  broken  down,  ended  his 
life  in  the  poor-house.  He  lost  everything;  while 
depositors  who  waited  recovered  most  of  their  de- 
posits. If  depositors  suffer  from  no  error  of  their 
own,  so  also  did  our  merchant  suffer  from  no 
error  which  he  could  have  repaired.  In  both 
cases,  the  persons  had  acted  involuntarily,  and 
both  had  to  take  the  chances  going  with  acts  of 
their  own  choice.  When  all  evil  and  possibility 
of  misjudgment  have  gone  from  our  world,  then, 
and  only  then,  may  we  think  of  insuring  the  whole 
class  of  creditors,  including  the  depositor. 

There  is  no  more  justice  in  laying  the  depositor's 
losses,  for  which  he  is  not  responsible,  upon 
others  who,  also,  are  not  responsible  for  the  losses, 
than  it  would  be  for  B,  who  has  been  robbed  by 
A,  to  ask  that  his  honest  neighbor  C  should  be 
robbed  to  make  up  for  his  loss.  No  matter  how 
confidingly  B  had  trusted  A,  C  is  not  responsible 
for  B's  voluntary  acts.  Similarly,  the  honest  and 
efficient  banks  cannot  in  justice  be  asked  to  make 
up  to  a  depositor  in  a  failed  bank  losses  for  which 
the  honest  and  efficient  banks  had  no  responsi- 
bility whatever.  It  would  be  clearly  unfair  to 
hold  a  small,  conservatively  managed  country 

215 


LATTER-DAY  PROBLEMS 

bank  responsible  for  the  "frenzied  finance"  of 
some  large  bank  in  a  great  city.  All  reason,  all 
justice,  demand  that  the  punishment  be  inflicted 
on  the  doer  of  the  wrong  and  not  on  the  innocent 
neighbor.  In  fact,  the  ethical  justification  for 
taxing  sound  banks  to  cover  the  lapses  of  unsound 
banks  has  no  existence  whatever.  It  is  unmoral. 
Moreover,  it  is  a  question  whether  the  courts  would 
enforce  such  a  law  against  the  rights  of  property. 

More  than  that,  it  is  not  supported  by  any  theory 
of  political  expediency  but  the  socialistic.  The 
advocates  of  insurance  deplore  the  suggestion  that 
it  is  socialistic,  and  are  as  much  horrified  by  the 
mention  of  socialism  as  the  devil  is  by  the  sight  of 
the  cross;  and  yet  what  does  the  analysis  show? 
It  is  not  necessary  to  explain  to  intelligent  readers 
that  socialism  is  not  correctly  defined  by  saying 
that  it  is  opposed  to  individualism ;  socialists  look 
to  the  State  to  do  for  them  what  they  admit 
that  they  cannot  do  for  themselves  under  a  sys- 
tem of  free  competition.  They  charge  against 
the  forms  of  society  what  is  due  to  the  deficiencies 
of  human  nature,  assuming  that  a  change  in  the 
forms  of  society  will  change  elemental  human 
nature.  The  failure  to  hold  their  own  in  the 

216 


GUARANTY  OF  BANK  DEPOSITS 

struggle  of  life  is  the  incentive  to  socialistic  think- 
ing. Disagreeable  as  it  may  sound,  in  reality  so- 
cialism is  the  philosophy  of  failure.  To  be  asked 
to  be  relieved  from  the  ill  success,  or  risk,  of  one's 
own  business  ventures  is  of  the  very  essence  of 
socialism.1  When  human  nature  has  changed  its 
spots,  and  can  be  trusted  to  go  straight  without 
existing  incentives,  then  we  may  begin  to  remove 
the  dread  of  loss  from  those  who  make  mistakes 
without  expecting  a  depreciation  of  human  fibre. 
It  is  only  because  men  must  look  out  for  them- 
selves that  they  differ  in  business  fibre  from  women 
and  children  who  are  separated  from  the  world 
of  competitive  effort.  One  may  admit  all  the  dis- 
tress arising  from  the  inability  of  the  depositor  to 
draw  his  deposits  in  cash ;  and  yet  one  would  not, 
as  a  consequence,  need  to  demand  insurance 
against  every  emergency  in  which  misery  may 
arise  from  the  hazards  of  business.  The  essential 
idea  in  the  scheme  for  guaranteeing  deposits  in 
commercial  banks — quite  apart  from  the  humble 
savings-bank  depositor — is  to  relieve  a  man  from 
the  responsibility  for  using  bad  business  judgment ; 
and  it  is  based  on  the  principle  of  freeing  men  from 
the  results  of  all  business  engagements  in  which 
1  See  chapter  II. 
217 


LATTER-DAY  PROBLEMS 

there  may  be  a  risk  of  loss.  If  we  once  begin  on 
this  principle,  we  must  care  for  all  those  who  have 
entered  into  the  relation  of  creditor  to  another. 
The  scheme  is  the  product  of  a  narrowness  which 
has  seen  only  one  superficial  phase  of  the  problem, 
and  which  has  hurried  to  a  general  conclusion 
without  having  studied  the  wide-reaching  effects  of 
an  enervating  and  impractical  policy. 

IV 

In  some  of  the  pleas  for  insurance,  deposits  are 
supposed  to  be  "all  the  money  people  possess," 
"the  people's  cash,"  a  "huge  volume  of  money." 
Since  this  sum,  fabulously  large,  is  in  the  banks, 
the  whole  business  fabric  rests  upon  the  banks. 
The  only  thing  which  sustains  this  critical  situa- 
tion is  the  confidence  of  the  depositors  in  the  bank ; 
when  time  of  stress  comes  this  confidence  gives 
way  to  distrust,  followed  by  a  scramble  for  cash. 
Then,  says  the  insurance  advocate,  do  that  which 
will  establish  perpetual  confidence  by  the  depositor 
in  the  bank,  and  we  shall  never  more  have  panics. 
The  plan  is  so  compact,  so  easy,  that  it  recalls  at 
once  the  naive  method  by  which  the  Chinaman 
got  his  supply  of  roast  pig. 

Probably  it  has  never  occurred  to  such  theorists 
218 


GUARANTY  OF  BANK  DEPOSITS 

to  examine  the  payments  to  a  bank  by  depositors 
in  any  one  day.  If  they  had,  they  would  find  that 
in  large  cities  the  cash  paid  in  was  insignificant 
compared  with  the  overwhelming  part  in  checks 
drawn  on  deposit  accounts.  Moreover,  the  deposit 
item  in  the  national  banks  now  moves  in  close 
correspondence,  in  amount  and  in  changes,  with 
the  loan  item.  In  fact,  a  loan  is  immediately  fol- 
lowed by  the  granting  of  a  deposit  in  favor  of  the 
borrower.  That  is,  the  large  mass  of  deposits  in 
commercial  banks  are  the  result  of  loans;  and  the 
creation  of  a  demand  deposit  is  always  accom- 
panied by  leaving  an  equivalent  value,  as  the 
security  for  the  deposit,  in  the  assets.  The  loan 
given  for  carrying  wheat,  or  cotton,  thirty  or 
ninety  days,  creates  a  demand  deposit,  which  can 
be  drawn  upon  on  demand  by  the  borrower;  but 
the  assets  have  gained  a  right  over  the  wheat,  or 
cotton,  or  its  equivalent  value,  which  will  issue  in 
some  means  of  payment  in  thirty  or  ninety  days. 
If  the  goods  are  salable,  the  deposits  are  safe.  In 
short,  the  deposits  are  as  safe  as  the  assets  on 
which  they  are  based ;  provided  loans  are  based  on 
commercial  paper,  the  deposits  are  as  safe  as  the 
quick  goods  passing  between  buyer  and  seller. 
The  deposits,  therefore,  depend  for  their  safety 

219 


LATTER-DAY  PROBLEMS 

upon  the  kind  of  assets  taken  by  a  bank  for  a 
loan ;  they  do  not  depend  upon  an  abstraction  like 
"confidence."  To  secure  safety  to  the  depositor, 
all  attention  should  converge  on  the  quality  and 
liquid  nature  of  the  assets  in  the  loan  account.  In 
order  to  have  confidence,  we  must  primarily  see  to 
it  that  loans  are  made  with  good  judgment.  The 
whole  matter  pivots  on  this  consideration.  The 
only  way  to  avoid  a  crisis  is  to  avoid  expansion; 
which  is  only  another  way  of  saying,  avoid  taking 
assets  which  will  not  certainly  protect  the  deposits 
when  liquidation  is  enforced. 

When,  therefore,  insurance  of  deposits  is  pro- 
posed as  a  means  of  preventing  panics,  because  it 
will  secure  confidence,  we  are  confronted  with  a 
singularly  crude  understanding  of  what  causes 
panics  and  what  the  operations  of  a  bank  really 
are.  Confidence,  of  course,  has  its  place  in  these 
matters ;  but  we  can  have  confidence  only  if  there 
is  a  basis  for  confidence.  In  case  one  sends  freight 
on  a  railway,  one  cannot  avoid  accidents  by 
serenely  leaning  back  and  assuming — after  Chris- 
tian Science  methods — confidence.  If  the  railway 
is  carelessly  managed  and  poorly  equipped,  there 
will  be  wrecks  and  destruction  of  freight,  no  matter 
what  the  mental  attitude  of  the  shipper  is.  But 

220 


GUARANTY  OF  BANK  DEPOSITS 

then,  says  the  insurance  advocate,  tax  all  the  rail- 
ways for  an  insurance  fund  to  pay  for  the  losses; 
and,  then,  notice  how  all  the  good  railways  will 
report  upon  the  bad  ones,  with  the  result  that 
there  will  be  no  more  accidents.  This  illustration 
brings  forth  the  nub  of  the  whole  question.  You 
can  prevent  accidents  and  losses  only  by  directing 
your  discipline  to  men  and  equipment;  you  can 
secure  safety  by  correct  railway  methods,  not 
merely  by  requesting  confidence.  No,  say  the 
insurance  advocates,  establish  a  guaranty  against 
all  losses,  and  you  will  have  confidence,  no  matter 
how  badly  a  railway  conducts  its  service;  and,  if 
good  railways  must  contribute,  they  will  see  that 
the  bad  railways  have  no  more  wrecks.  Imagine, 
in  practice,  the  outcome  if  the  Pennsylvania  Rail- 
way were  to  be  called  upon  to  pay  for  damages 
due  to  accidents  on  the  Erie  or  on  the  Baltimore 
and  Ohio.  The  Pennsylvania,  if  well  and  safely 
conducted,  has  enough  to  do  to  watch  its  own  road, 
to  say  nothing  of  a  road  over  which  it  has  no  daily 
and  direct  control.  If  the  poor  road  were  free 
from  all  responsibility  for  damages  due  to  its  own 
management,  what  incentive  would  there  be  to 
improve  its  methods?  Insuring  the  goods  may 
reimburse  the  shipper,  but  it  does  not  touch  the 

221 


LATTER-DAY  PROBLEMS 

internal  conduct  of  the  road.  _  And,  if  a  good  road 
gets  no  advantage  from  its  fine  road-bed,  its  solid 
bridges,  its  well-trained  force,  why  should  it  keep 
up  its  superior  condition?  If  it  does  not  gain 
traffic  by  its  superior  condition  over  an  inferior 
road,  there  is  no  reason  for  expenditure  of  mind 
and  money  in  safeguards. 

The  parallel  between  the  railways  and  the  banks 
is  practically  complete.  Confidence  in  banks  can 
be  due,  not  to  external  forces,  like  insurance  of  any 
losses  which  may  occur,  but  to  internal  forces 
directed  upon  the  methods  of  business  manage- 
ment, and  the  quality  of  the  assets  which  serve  as 
the  security  for  the  deposits.  If  the  internal  man- 
agement is  careful  and  judicious,  the  deposits  are 
safe,  and  we  can  have  confidence  in  their  safety. 
Moreover,  if  a  good  bank  gets  no  advantage  from 
its  sound  business  methods,  its  conservative  loans, 
its  skill  in  avoiding  losses,  and  its  experienced 
staff,  why  should  it  try  to  keep  a  superior  standard  ? 
The  insurance  idea  seems  to  be  that  we  can  have 
confidence  in  banks,  if  only  some  one  will  pay  the 
losses.  This  is  as  much  as  to  say,  we  are  not 
afraid  of  fire,  even  if  incendiaries  are  about,  be- 
cause we  are  insured;  when,  in  truth,  the  only 
permanent  confidence  is  due  to  measures  which 

222 


GUARANTY  OF  BANK  DEPOSITS 

will  eliminate  the  incendiaries.  So,  in  banking, 
everything  is  secondary  to  the  character  of  the 
assets  in  the  loan  item. 

It  cannot  be  insisted  upon  too  strongly  that  the 
effort  to  create  confidence  and  prevent  panics  by 
insurance  of  deposits  is  going  to  the  wrong  end  of 
the  problem.  The  deposits  can  never  be  any 
safer  than  the  assets.  Therefore,  if  we  wish  to 
create  confidence  and  prevent  panics,  every  effort 
should  be  directed  to  securing  only  the  safest  kind 
of  assets.  This  is  the  crux  of  the  whole  matter. 
To  talk  only  of  insurance,  and  to  minimize  the  im- 
portance of  the  quality  of  the  assets,  is  only  to  act 
after  the  damage  is  done ;  to  close  the  stable  door 
after  the  horse  is  gone.  Of  course,  the  insurance 
advocate  will  say  that  insurance  will  bring  about 
safer  banking  methods;  but  of  that  more  later  on. 

The  insurance  theorists  probably  mean  that 
their  scheme  would  prevent  a  panic,  because  it 
would  prevent  a  run  on  any  bank  in  the  system. 
One  would  be  curious  to  know  upon  what  analysis 
of  credit  operations  a  crisis  could  be  regarded  as 
due  merely  to  the  state  of  mind  which  leads  to  a 
run  for  cash.  In  truth  a  run,  a  lack  of  confidence, 
is  a  consequence,  not  a  cause,  of  panic  conditions. 
It  is  a  consequence  of  doubt  as  to  the  kind  of  busi- 

223 


LATTER-DAY  PROBLEMS 

ness  the  banks  have  been  doing;  it  is  a  consequence 
as  has  already  been  insisted  upon — of  the  poor 
quality  of  the  assets.  Every  experienced  man  of 
affairs  knows  that  the  material  for  a  financial 
catastrophe  is  collected  by  previous  years  of  ex- 
travagance, over-trading,  and  expansion  of  credit; 
and  that  it  is  only  an  accident  whether  it  is 
this  or  that  event  which  touches  off  the  powder 
magazine.  The  actual  liquidation  in  the  months 
following  the  panic  of  1907  shows  upon  what  mis- 
taken calculations  many  of  our  loans  were  based, 
and  how  rotten  much  of  our  credit  fabric  was. 
The  Heinze-Morse  affairs  of  October,  1907,  were 
only  one  set  of  incidents  in  a  series  of  existing 
weaknesses,  which  had  shown  their  appearance  as 
early  as  the  previous  March.  Now,  when  the 
assets  in  the  loan  item  of  the  banks  have  only  a 
fictitious  value,  when  they  lose  their  liquid  quality, 
it  is  childish  to  talk  about  creating  "confidence" 
by  legislation,  or  by  such  a  scheme  as  guaranty 
of  deposits.  It  would  not  change  the  previous 
expansion  of  credit.  A  run  is  merely  the  logical 
sequence  of  what  has  gone  before;  and  the  evils 
of  the  past  need  time  to  be  worked  out.  You  may 
put  salve  on  the  spot  kicked  by  a  mule,  but  the 
salve  cannot  be  said  to  have  prevented  the  kick. 

224 


GUARANTY  OF  BANK  DEPOSITS 


If  the  advocates  of  deposit-insurance  are  really 
in  earnest  in  wishing  to  mitigate  the  effects  of 
an  unreasoning  run  by  depositors — after  previous 
conditions  have  produced  a  crisis — let  them  care- 
fully consider  the  reforms  needed  in  our  system 
of  bank-note  issues.  When  unfavorable  develop- 
ments, like  the  Heinze  and  Morse  revelations, 
created  a  suspicion  as  to  banking  soundness,  then 
suddenly  psychological  conditions  appeared  arising 
from  alarm  as  to  the  safety  of  deposits.  Could  a 
guaranty  of  deposits  be  a  rational  cure  for  this 
fear?  Let  me  explain  briefly  the  situation  which 
makes  a  run  dangerous.  In  order  to  serve  the 
public,  the  bank  gives  a  borrower  present  means 
of  payment  in  return  for  which  the  bank  will  get 
repayment  by  waiting  a  short  time.  In  reality, 
when  the  bank  gives  him  a  right  to  draw  on  de- 
mand, the  whole  risk  as  to  the  transaction  turning 
out  right  falls  on  the  bank;  that  is,  the  bank  veri- 
tably insures  the  soundness  of  the  business  trans- 
action on  which  the  loan  was  based.  Quite 
effectively,  the  banks  express  the 'value  of  salable 
goods  in  a  means  of  payment,  and  enable  a  bor- 

225 


LATTER-DAY  PROBLEMS 

rower,  by  checks  on  a  deposit  account,  to  exchange 
the  value  of  his  goods  for  other  goods  which  he 
wishes  to  buy.  Obviously,  no  one  wishes  cash, 
because  he  loses  interest  on  it  so  long  as  it  is  in  his 
possession.  Hence,  when  affairs  are  normal,  men 
do  not  ask  for  cash — not  even  for  the  percentage 
required  in  the  legal  reserves.  This  explains  why 
a  bank  may  legitimately  have  $70,000,000  of  de- 
mand deposits,  and  yet  perhaps  keep  only  $18,000,- 
ooo  of  cash  reserves.  Now,  under  such  condi- 
tions, what  happens  if  the  customers  lose  their 
heads,  and  all  ask  for  cash?  Of  course,  they 
could  not  all  get  it;  and  these  customers,  under 
an  unwritten  law,  became  depositors,  knowing 
they  could  not  get  it.  In  spite  of  the  superficial 
impression  that  a  deposit  in  a  bank  is  cash,  it  is 
not  so  in  reality;  and  it  could  never  have  been  so 
"nominated  in  the  bond,"  if  wanted  all  at  once. 
Nor  could  any  conceivable  guaranty  fund  be 
enough  to  provide  the  cash.  It  is  an  utter  im- 
possibility. 

But,  on  the  other  hand,  observe  that  the  whole 
object  intended  by  a  guaranty  of  deposits  could 
be  gained  by  a  safe  and  properly  elastic  note- 
issue — such  as  has  been  proposed  in  the  Fowler 
and  other  bills.  It  would  enable  the  immediate  ex- 

226 


GUARANTY  OF  BANK  DEPOSITS 

change  of  a  deposit  liability  into  a  note  liability, 
without  altering  the  relation  of  reserves  to  demand 
liabilities,  and  yet  retaining  for  the  notes  the  same 
assets  as  security  which  previously  were  regarded 
as  safe  for  the  deposits.  Not  only  would  this  plan 
not  diminish  the  power  of  the  bank  to  lend,  but 
it  would  save  its  reserves  of  lawful  money  from 
being  drawn  upon,  and  thus  even  increase  the 
ability  to  lend  to  needy  borrowers.  But  it  would 
do  another  very  important  thing:  it  would  quiet 
the  psychological  conditions  leading  to  runs,  by 
enabling  the  bank  to  pay  out  its  own  obligations 
in  the  form  of  "money"  which  would  satisfy  the 
demand  to  hoard,  and  enable  trust  companies, 
and  other  institutions,  to  be  supplied  with  cash. 
If  national  banks,  in  the  crisis  of  1907,  had  been 
able  to  reduce  demand  deposits  by  increasing  de- 
mand notes,  in  the  same  proportion,  they  would 
have  been  able  to  meet  the  request  for  pay-rolls, 
and  for  the  cash  needed  in  ordinary  retail  trade, 
without  having  had  practically  to  suspend  pay- 
ment from  the  Atlantic  to  the  Pacific.  By  pro- 
viding notes,  the  banks  would  not  have  obliged 
business  houses,  as  they  did,  because  of  the  sus- 
pension in  that  crisis,  to  withhold  their  daily 
cash  receipts  and  not  deposit  them  in  the  banks. 

227 


LATTER-DAY  PROBLEMS 

Moreover,  if  depositors  could  have  obtained  notes 
pro  tanto,  the  newly  born  agitation  for  the  guaranty 
of  deposits  would,  in  all  probability,  have  never 
made  any  headway.  In  fact,  the  demand  for  a 
guaranty  of  deposits  ought  to  be  directed  into  a 
thoughtful  demand  for  a  system  of  note-issues 
which  would  effectively  remove  the  difficulties 
under  which  depositors  labor  in  the  hours  of  a 
panic. 

Still  further,  it  should  be  mentioned  that  these 
new  note-issues  should  in  no  respect  differ  in 
color,  design,  security,  or  wording,  from  notes 
previously  issued  in  normal  times.  In  a  crisis, 
or  in  the  critical  conditions  preceding  one,  or  in 
any  emergency  of  the  money  market,  it  should  not 
be  necessary  to  go  out  with  a  brass  band  to  inform 
the  public  that  it  was  quite  time  to  get  into  a  panic 
because  special  emergency  notes  were  about  to 
be  issued. 

In  times  of  stress,  however,  the  depositor's  need 
is  not  the  most  important;  for  if  he  has  a  deposit 
he  can  pay  a  debt  by  a  check.  We  must  consider, 
in  this  matter,  not  the  banks,  but  the  great  busi- 
ness public  who  need  help.  The  fundamental 
need  is  the  grant  of  a  loan,  or  the  continuation  of 
an  old  one,  which  gives  the  right  to  draw  on  a 

228 


GUARANTY  OF  BANK  DEPOSITS 

deposit.  In  a  panic  men  are  driven  to  liquidate, 
to  throw  over  securities  to  meet  maturing  obliga- 
tions. A  loan  is  the  protection  from  ruin.  If 
legitimate  borrowers  can  get  loans,  the  worst  is 
over.  Now,  it  is  needless  to  say  that  a  guaranty 
of  deposits  does  not  in  any  way  affect  the  ability  of 
a  bank  to  lend  in  a  time  of  panic;  therefore,  it  will 
have  no  appreciable  influence  in  relieving  the  con- 
ditions brought  on  by  a  collapse  of  credit.  The 
only  thing  that  it  can  do,  at  the  best,  is  to  save  the 
depositor  from  waiting  for  his  funds  during  the 
time  of  liquidation ;  and  even  this  purpose  is  now 
abandoned  by  insurance  advocates  as  impossible. 
The  real  alarm — and  the  one  which  needs  to  be 
quieted — is  that  based  on  questions  as  to  the  value 
and  character  of  the  assets  of  the  bank;  and  that 
depends  upon  the  whole  management  in  a  time 
reaching  back  into  the  past. 

VI 

The  plan  for  insurance  of  deposits  is  urged  by 
its  advocates  as  one  which  will  induce  more  care- 
ful banking,  because  contributors  to  the  fund  will 
be  more  vigilant  in  acting  as  policeman  over  other 
bankers,  and  stop  illegitimate  methods  in  their 
inception.  On  the  other  hand,  its  opponents 

229 


LATTER-DAY  PROBLEMS 

claim  that  it  will  reduce  the  best  managed  to  the 
level  of  the  worst  managed  bank,  and  remove  all 
premium  on  skill,  honesty,  and  ability. 

Obviously,  the  deposits  of  a  bank  are  as  safe  as 
the  value  of  the  assets  in  the  loan  item,  no  more, 
no  less.  Apart  from  fraud  and  stealing,  what  is 
bad  banking?  Clearly,  it  is  the  lending  of  too 
much  to  favored,  or  inside,  parties;  and  the  in- 
ability to  know  good  from  bad  paper,  and  "quick" 
from  tied-up  investments.  Every  conceivable  re- 
ward should  exist  to  bring  pressure  on  a  banker 
to  have  courage  in  declining  questionable  loans. 
The  moment  such  pressure  is  removed,  the  oppor- 
tunity is  enlarged  for  taking  on  assets,  which,  at 
the  first  real  emergency,  will  crumble  in  value, 
and  leave  the  depositors  unsecured  even  by  long 
and  difficult  liquidation.  Therefore,  to  relieve 
the  banker  from  the  logical  consequences  of  his 
own  mistakes,  of  his  own  weaknesses,  is  to  take 
away  practically  the  only  real  safeguard  likely  to 
act  on  human  nature  in  a  business  touching  the 
trusts  of  countless  financial  interests.  The  result 
of  such  a  guaranty  would,  in  my  opinion,  tend  to 
put  a  premium  on  the  "popular"  and  "obliging" 
banker,  as  against  the  careful  and  judicious 
banker;  to  spread  throughout  the  country  the  in- 

230 


GUARANTY  OF  BANK  DEPOSITS 

fluence  of  men  who  care  more  for  bigness  than  for 
safety  in  their  accounts;  to  build  up  credit  un- 
supported by  legitimate  trade;  and  in  the  end 
to  bring  on  financial  convulsions  proportional 
in  disaster  to  the  extent  of  the  doubtful  banking. 
Not  only  would  it  be  unjust  to  ask  the  efficient  to 
meet  the  losses  of  the  inefficient,  but  it  is  poor 
policy  to  stimulate  the  inefficient  to  try  to  do  that 
for  which  they  are  unfit. 

An  essential  difference  between  banks  in  man- 
agement, stability,  conservatism,  and  success  can- 
not wisely  or  justly  be  wiped  out,  without  losing 
the  very  elements  of  safety  and  permanence  in  our 
business  relations.  A  great  bank  with  a  large 
capital  and  surplus  affords  a  wider  margin  of 
safety  to  deposits  than  can  be  afforded  by  a  small 
bank;  and  the  large  bank  will  draw  deposits  for 
these  very  reasons.  Moreover,  depositors  in  prac- 
tice keep  their  deposits  where  they  are  likely  to  be 
able  to  get  loans  from  time  to  time;  and  an  ex- 
amination of  figures  in  any  commercial  bank 
would  probably  show  that,  during  any  given 
season,  some  large  depositors  had  been  owing  the 
bank  about  as  much  in  the  form  of  loans  as  the 
bank  was  owing  the  depositors.  In  that  case,  in 
order  to  treat  both  sides  fairly,  would  it  not  be 

231 


LATTER-DAY  PROBLEMS 

just  to  ask  the  depositors  also  to  insure  the  banks 
against  loss  from  loans  ?  In  fact,  if  the  argument 
for  insurance  of  deposits  has  any  validity,  then  the 
same  system,  in  order  to  treat  both  interests  in 
question  with  equal  justice,  should  be  extended 
by  a  tax  on  all  borrowers  to  insure  the  bank  from 
loss  from  unfortunate  loans.  If  this  were  done 
there  would  be  no  need  of  guaranteeing  deposits; 
for  if  assets  were  safe,  deposits  would  be  safe. 
Indeed,  too  much  is  claimed  for  this  guaranty  of 
deposits.  All  the  gains  of  society  are  credited  to  it, 
until  one  is  inclined  to  think  its  advocates  see  in 
the  term  only  the  initials  of  the  words,  and  have 
made  it  into  a  G.  O.  D. 

Since  the  guaranty  of  deposits  will  not  prevent 
the  materials  for  a  crisis  gathering;  since  it  will 
not  advance  sound  banking  methods;  since  it  is 
unjust  to  legitimate  bankers;  and  since  all  the 
benefits  to  be  gained  by  it  can  be  secured  by  a 
proper  note  issue  (which  would  mitigate  runs),  or 
by  better  methods  of  banking,  there  is  no  great 
reason  for  going  into  a  scheme  which  is  as  dis- 
tinctly socialistic  as  this  one.  Moreover,  among 
the  means  of  securing  better  banking  is  the  im- 
provement of  national  bank  inspections.  At 
present,  appointments  as  inspectors  are  made  for 

232 


GUARANTY  OF  BANK  DEPOSITS 

political,  and  not  for  expert,  qualifications;  nor 
are  the  fees,  assignments,  and  frequency  of  ex- 
aminations what  they  should  be.  The  Clearing 
House  Associations,  in  default  of  proper  national 
inspections,  and  also  to  aid  in  legitimate  banking 
by  State  banks  and  the  trust  companies  clearing 
through  their  associations,  have  established  inspec- 
tion agencies  of  their  own,  which  have  proved  re- 
markably efficient  in  securing  safety  to  the  com- 
munity from  failures.  Such  action  is  worth  all 
the  guaranty  schemes  ever  born  in  giving  protec- 
tion to  depositors,  and  it  is  done  in  the  only  busi- 
ness-like way  practicable.  The  example  set  by 
the  Clearing  House  Association  of  Chicago,  after 
the  Walsh  failure,  is  being  followed  in  other  cities. 

vn 

When  examined  from  the  point  of  view  of  tech- 
nical insurance  principles,  the  guaranty  method  is 
not  impossible  of  treatment  for  the  hazard  in- 
curred. Any  uncertainty  can  be  insured,  pro- 
vided the  premium  is  large  enough.  It  is  said  that 
companies  already  exist  ready  to  insure  deposits 
at  one-fourth  of  one  per  cent. ;  but  they  evidently 
expect  to  choose  the  banks.  And  just  here  arises 
the  central  difficulty.  In  ordinary  fire  insurance, 

233 


LATTER-DAY  PROBLEMS 

one  enters  it  voluntarily;  and  one  gets  a  different 
rate  according  to  differences  in  the  moral  and 
physical  hazard.  Yet  in  the  guaranty  of  deposits 
all  banks  are  forced  to  enter  the  scheme.  If  a 
group  of  banks  of  high  standing  voluntarily  chose 
to  insure  each  other's  deposits,  because  they  had 
confidence  in  each  other's  management,  that 
would  be  a  different  thing  from  the  plan  generally 
proposed.  Moreover,  the  parallel  with  fire  in- 
surance, in  which  the  owners  of  the  property 
risked  pay  the  premium,  and  the  insurance  of 
deposits,  in  which  the  depositor  does  not  pay  the 
premium,  does  not  hold.  As  a  strictly  insurance 
question,  it  should  be  left  to  the  insurance  com- 
panies and  the  depositors.  This  was  practically 
the  outcome  reached  by  the  Kansas  legislature, 
which,  following  the  radical  action  of  Okla- 
homa, has  established  a  guaranty  of  deposits  by 
State  law. 

If  the  guaranty  is  desired  for  the  immediate 
redemption  of  all  deposits  in  failed  banks  in  any 
crisis,  a  very  large  fund  in  cash  would  be  required. 
For  deposits  in  national  banks  alone,  a  five-per- 
cent, fund  would  be  about  $216,000,000 — a  sum 
too  large  to  be  allowed  to  lie  idle  in  cash.  If  in- 
vested in  bonds,  it  can  no  longer  be  regarded  as 

234 


GUARANTY  OF  BANK  DEPOSITS 

available  for  immediate  redemption.  In  fact,  the 
aim  of  immediate  redemption,  as  already  said, 
seems  to  have  been  dropped.  If,  on  the  other 
hand,  the  guaranty  is  intended  only  for  ultimate 
redemption,  after  the  bank's  assets  have  been 
liquidated,  it  will  not  materially  change  existing 
conditions,  and  will  not  give  ardent  advocates  of 
deposit-insurance  what  they  are  clamoring  for — 
the  immediate  control  of  their  funds  in  failed 
banks.  Of  course,  it  might  be  said  that,  if  ulti- 
mate redemption  were  assured,  deposit  accounts 
in  failed  banks  would  become  negotiable,  like  any 
other  delayed  payments.  But  the  same  is  true  now : 
the  accounts  in  the  suspended  Knickerbocker 
Trust  Company  were  bought  and  sold  in  1907; 
and  the  price  should  properly  vary  with  the  time 
of  discount  and  the  risks  involved.  The  average 
annual  losses  to  depositors  in  national  banks, 
after  complete  liquidation,  have  been  remarkably 
small,  or  only  one-twentieth  of  one  per  cent,  for 
forty-three  years.  This  fact  has  been  used  to 
prove  how  small  the  guaranty  fund  need  be.  But 
if  ultimate  redemption  is  accomplished  with  such 
little  loss,  there  is  not  so  great  a  need  for  a  fund  as 
supposed.  The  error  of  the  insurance  theorists  is 
in  confusing  ultimate  with  immediate  redemption, 

235 


LATTER-DAY  PROBLEMS 

and  arguing  that  if  a  small  fund  is  needed  for  the 
former,  the  latter  can  be  as  easily  provided  for. 
The  mistake  is  patent. 

vm 

Finally,  the  appeal  to  history  gives  the  plan  no 
authority.  We  have  had  experience  with  a  guar- 
anty of  deposits  in  New  York  under  the  Safety 
Fund  Act,  of  April  2, 1829.  The  conditions  of  the 
country  and  the  understanding  of  banking  were 
such  at  that  time  that  the  lessons  from  that  experi- 
ment cannot  have  very  much  value.  Then,  there 
was  held  only  one  reserve  for  both  notes  and  de- 
posits. Expansion  of  loans  in  those  days  meant, 
in  the  main,  an  expansion  of  notes.  The  safety 
fund  was,  therefore,  a  protection  to  both  notes 
and  deposits;  but  as  business  was  then  largely 
done  by  notes,  its  service  was  much  as  would  be 
rendered  to-day  by  a  guaranty  of  deposits.  What 
then  was  the  outcome  ?  The  fund  was  established 
by  levying  a  tax  of  one-half  of  one  per  cent,  on  the 
capital  stock,  until  a  fund  of  three  per  cent,  was 
reached.  After  eight  years,  the  fund  was  tested 
by  the  crisis  of  1837,  when  there  were  ninety  banks 
in  operation  with  a  capital  of  $32,200,000.  All 
the  banks  suspended,  and  the  act  itself  was  sus- 

236 


GUARANTY  OF  BANK  DEPOSITS 

pended  for  a  year.  Again,  in  1840-1842,  the  sys- 
tem was  put  to  test  by  eleven  serious  bank  failures. 
Thereupon,  in  1842,  it  was  decreed  that  the  fund 
should  hereafter  be  used  only  for  the  redemption 
of  the  notes  of  failed  banks.  The  experience  of 
Vermont  and  Michigan  is  still  less  satisfactory. 
In  brief,  as  a  guaranty  of  deposits  it  proved  a 
signal  failure — although  the  experiment,  as  I  have 
said,  is  not  conclusive  for  present  conditions. 


237 


CHAPTER  IX 
THE    DEPOSITOR   AND    THE   BANK 

ALL  bankers  ought  to  welcome  the  discussion 
caused  by  the  proposal  to  guarantee  depos- 
its, because  it  will  inevitably  bring  out  a  better 
understanding  of  the  vital  functions  of  banking 
and  better  explain  the  true  services  of  banks  to 
the  community.  All  that  bankers  can  desire  is 
the  truth  about  their  business.  It  is  undoubtedly 
clear  that  the  reason  for  there  being  any  question 
at  all  to  discuss  exists  in  the  misunderstanding  in 
certain  quarters  as  to  what  banks  really  do,  and  as 
to  what  is  essential  to  sound  banking  and  the 
safety  of  depositors.  There  can  be  a  wish  only 
for  a  fair  field  and  a  full  discussion. 

The  argument  in  favor  of  insuring  deposits  is 
addressed  to  two  classes,  (i)  the  depositors,  and 
(2)  the  bankers  and  stockholders  in  banks.  In 
this  order  we  shall  discuss  the  subject. 

238 


THE  DEPOSITOR  AND  THE  BANK 


(i)  In  this  country  there  are  persons  who  are 
willing  to  set  class  against  class,  to  stir  up  antago- 
nisms between  interests  which  are  really  bound 
together,  provided  they  can  thereby  create  polit- 
ical issues  on  which  they  can  be  voted  into  office. 
We  all  remember  how  the  feelings  engendered  by 
the  Civil  War  between  the  North  and  the  South 
were  appealed  to  by  ruthless  and  selfish  politicians 
who  were  ambitious  for  public  positions.  Later, 
politicians  have  not  hesitated  to  magnify  the  differ- 
ences between  capital  and  labor  for  selfish  reasons, 
instead  of  patriotically  trying  to  emphasize  their 
common  interests  and  to  promote  industrial  peace. 
And  now  an  attempt  seems  to  be  made,  in  similar 
fashion,  to  set  the  interests  of  15,000,000  de- 
positors of  our  country  against  those  of  the 
1,500,000  of  stockholders  in  banks.  In  truth, 
their  interests  are  bound  up  together;  the  loss  of 
one  is  the  loss  of  the  other.  No  antagonism  ex- 
ists between  them;  and  the  only  explanation  of 
an  attempt  to  create  such  an  antagonism  must  be 
the  almost  impossible  supposition  that  there  are 
15,000,000  votes  among  the  depositors,  and  only 

239 


LATTER-DAY  PROBLEMS 

1,500,000  among  the  bank  stockholders — a  sup- 
position so  inconceivable  to  a  loyal  American  that 
we  must  dismiss  it  at  once.  The  solvency  of  a 
bank  is  dependent  on  the  solvency  of  the  business 
men  who  are  its  customers  and  borrowers,  and 
the  depositors  whose  funds  are  loaned  are  no  more 
interested  in  the  solvency  of  these  business  men 
than  the  bank  itself.  The  passengers  on  a  steamer 
and  the  owners  of  the  steamer  are  equally  inter- 
ested in  not  having  the  steamer  sink.  So  it  is 
with  the  depositor  and  the  bank. 

(2)  It  is  said  that  it  is  the  depositor  who  makes 
banking  profitable.  Here  appears  a  misconception 
as  to  the  banking  business.  In  reality,  deposits 
are  only  the  raw  materials  for  profits;  they  must 
be  wisely  and  skilfully  managed  and  invested  or 
there  would  be,  not  only  no  profits,  but  even 
losses.  To  have  a  profitable  result,  we  need 
skilled  labor  to  work  up  the  raw  materials,  not 
only  in  industry,  but  in  banking.  The  mere  ex- 
istence of  capital  does  not  insure  profits;  every- 
thing depends  upon  what  is  done  with  the  capital. 
Capital  is  often  badly  invested  and  lost.  In 
banking,  we  shall  see  that  practically  every- 
thing depends  upon  wise,  honest,  and  capable 
management. 

240 


THE  DEPOSITOR  AND  THE  BANK 

Moreover,  since  the  days  of  the  Bank  of  Venice, 
banks  have  come  into  existence  as  a  means  of 
satisfying  a  need  of  the  business  public.  Per- 
sons deposit  in  banks  voluntarily  because  they  get 
privileges  in  return:  sometimes  interest  on  de- 
posits; collection  of  checks  deposited;  a  chance 
to  get  loans  where  deposits  are  kept;  and,  above 
all,  the  banks  provide  the  most  convenient,  least 
expensive,  and  most  generally  used  medium  of 
exchange  ever  devised,  by  which  payments  can  be 
made  anywhere  in  the  land  through  checks  drawn 
on  a  private  account;  and  all  the  expense  of  this 
book-keeping  is  usually  given  free  to  the  depositor. 
All  the  monetary  services  of  the  general  govern- 
ment, all  the  issues  of  every  kind  of  paper  money, 
do  not  begin  to  compare  with  the  work  of  exchang- 
ing goods  done  by  the  banks  and  clearing  houses 
through  checks  drawn  by  depositors  on  their 
accounts.  Take  that  away  from  the  depositors 
for  twenty-four  hours,  and  the  whole  trade  of  the 
country  would  be  paralyzed;  and  yet  there  are 
persons  so  ignorant  as  to  say  that  depositors  are 
not  given  anything  in  return  by  the  banks. 

(3)  But  the  ignorance  of  commercial  banking 
shown  by  the  advocates  of  a  guaranty  of  deposits 
goes  still  further,  when  they  demand  such  a 

241 


LATTER-DAY  PROBLEMS 

guaranty  on  the  ground  of  justice  to  depositors: 
that  they  ought  to  have  a  place  wherein  they  could 
leave  money  and  get  it  again  whenever  they  want 
it.  Now,  if  a  depositor  wishes  none  of  the  privi- 
leges of  a  checking  account  in  a  commercial  bank, 
he  can  put  his  money  in  a  safety  vault,  and  get  it 
again  whenever  he  wants  it.  In  a  commercial 
bank,  on  the  other  hand,  it  is  never  pretended 
that  if  all  depositors  wanted  their  money  all 
could  get  it.  Why  ?  Because  a  commercial  bank 
could  not  exist  if  it  did  not  invest  funds  deposited 
with  it.  It  creates  demand  liabilities  for  all  de- 
posits, but  it  tries  to  have  paper  maturing  in  such 
a  continuous  way  that  it  can  meet  all  normal 
demands  for  cash.  A  solvent  bank  can  always 
meet  cash  demands  if  given  suitable  notice  of 
what  is  coming.  Yet  the  agitator,  who  does  not 
seem  to  know  the  difference  between  a  safety 
vault  and  a  commercial  bank,  asks  for  what  is 
humanly  impossible — as  a  matter  of  justice.  He 
asks  that  banks  should  receive  the  deposit,  but  in 
the  same  breath  he  assumes  that  they  should  never 
do  anything  with  it.  Justice  is  given  when,  and 
only  when,  the  banks  invest  in  sound  assets;  and 
all  depositors  can  secure  their  funds  only  when  the 
management  is  successful,  cautious,  and  conserva- 

242 


THE  DEPOSITOR  AND  THE  BANK 

tive.  The  deposits,  in  short,  are  as  safe  as  the 
assets  are  good ;  and  the  sum  and  substance  of  the 
whole  matter  is  to  be  found  in  the  character  of  the 
management.  We  come  back  to  this  truth  from 
whatever  point  we  begin  our  researches. 

I  have  said  that  the  safety  of  the  deposits  de- 
pends upon  what  is  done  with  them.  The  deposits, 
as  is  well  known,  are  loaned  out.  Now,  if  you 
should  force  all  the  borrowers  of  a  bank  to  insure 
that  bank  against  losses  from  bad  loans,  you 
would  give  both  the  bank  and  the  depositor  abso- 
lute safety.  But  if  the  borrower  of  good  credit 
declines  to  be  responsible  for  the  borrower  of  poor 
credit,  you  cannot  blame  the  safe  banker  for  re- 
fusing to  be  responsible  for  the  speculative  banker. 

(4)  Yet  it  may  be  said  that  commercial  banks 
have  a  quasi-public  function;  that  depositors  are 
innocent  of  the  inside  doings  of  banks;  that  when 
the  banks  invest  deposits  they  put  them  out  of 
reach  of  the  depositor;  and  that  too  much  is 
asked  when  the  depositor  is  required  to  trust  to 
the  soundness  of  the  investing  judgment  of  bank 
officials.  It  is  further  added  that  when  the  author- 
ities of  a  Government,  State,  or  city  deposit  with 
banks,  security  for  the  deposit  is  given;  and  that 
if  a  bank  exacts  security  from  the  borrower,  the 

243 


LATTER-DAY  PROBLEMS 

bank  should  give  security  to  the  depositor.  If  a 
State  or  city  exacts  security  for  its  deposits,  it  is 
the  subject  of  a  special  contract  between  the  de- 
positor and  the  bank  in  which  the  deposit  is  made. 
If  a  private  depositor  wishes  to  make  a  similar 
special  arrangement  with  a  bank,  it  can  do  so. 
But  now  mark  just  where  the  guaranty  advocates 
miss  the  point.  They  are  not  urging  that  each 
bank  should  guaranty  its  own  depositors,  but  that 
a  sound  bank  should  guaranty  depositors  that  it 
never  heard  of,  in  a  bank  over  whose  management 
it  has  never  had  the  slightest  control.  That  is 
unjust.  It  is  even  robbery.  To  this  case  is 
joined  the  proposition  that  the  very  existence  of 
banks  organized  under  a  national  act  gives  a 
presumption  to  the  trustful  public  that  such  banks 
are  sound;  and,  if  so,  the  Government  should  see 
to  it  that  the  depositors  are  made  absolutely  safe. 
Like  serious-minded  business  men,  let  us  look 
this  case  squarely  in  the  face.  Apart  from  the 
great  privileges  given  by  the  bank  to  depositors 
— already  described — do  the  banks  recognize  the 
fact  of  their  quasi-public  function,  and  that  they 
must  give  security  to  depositors  for  exercising  good 
judgment  in  making  loans  with  the  knowledge 
that  the  stockholders  will  suffer  a  heavy  loss  in 

244 


THE  DEPOSITOR  AND  THE  BANK 

case  of  error  or  fraud  ?  I  answer,  unequivocally, 
they  do.  In  fact,  the  childish  ignorance  shown 
by  the  advocates  of  insurance  of  deposits  in  no 
part  of  their  argument  appears  more  amazing 
than  in  not  knowing  that  the  banks  now  put  up  a 
very  large  fund  as  a  security  for  depositors. 

There  are  only  two  possible  ways  of  using  a 
guaranty  fund:  either  for  (a)  ultimate,  or  for  (b) 
immediate  redemption  of  deposits.  Let  us  con- 
sider ultimate  redemption  first.  Is  it  conceivable 
that  the  political  orators  do  not  know  that  there 
is  already  a  guaranty  fund  for  the  ultimate  pay- 
ment of  deposits?  The  capital,  surplus,  and  un- 
divided profits  of  every  national  bank  is  to-day 
the  buffer  between  the  depositor  and  loss.  Only 
after  the  misjudgment  of  a  bank  has  destroyed  its 
capital,  surplus,  profits,  and  shareholders'  lia- 
bility can  the  depositor  suffer  loss.  Is  this  effec- 
tive, in  fact?  That  it  is  effective  is  disclosed  by 
the  figures,  quoted  even  by  the  guaranty  advocates, 
that  the  loss  to  depositors  in  over  forty  years  of  the 
National  Bank  System  is  only  1/26  of  i  per  cent, 
per  annum.  Here,  then,  we  have  final  and  com- 
plete proof  that  the  banks  do  now  insure  the  de- 
positor at  the  risk  of  great  loss  to  themselves. 
On  May  14,  1908,  the  amount  of  this  ultimate 

245 


LATTER-DAY  PROBLEMS 

guaranty   fund   was   as   follows,   for   the   6,778 
national  banks: 

Capital $912,361,919.59 

Surplus 555,000,248.14 

Undivided  Profits 203,108,414.78 

Stockholders'  Liability  * 273,000,000.00 

Total $1,943,470,582.51 

Omitting  deposits  in  the  national  banks  by 
the  Government  and  disbursing  officers  to  the 
amount  of  about  $180,000,000,  which  are  covered 
by  bonds,  the  private  deposits  amounted,  at  the 
same  date,  to  $4,313,656,789.59.  Therefore,  the 
insurance  fund  for  all  the  banks  amounts  to 
about  45  per  cent,  of  all  the  private  deposits. 
This  shows,  of  course,  that  when  a  depositor  is 
considering  the  selection  of  an  individual  bank 
in  which  to  deposit  he  gets  a  larger  security, 
other  things  being  equal,  from  those  having  the 
largest  capital,  surplus,  and  undivided  profits. 

1  Although  the  shareholders'  liability  is  legally  equal  to  the 
capital  stock  held  ($912,361,919.59),  yet  it  is  well  known  that 
actual  collections  fall  short  of  the  legal  total.  Shareholders  may 
have  no  other  attachable  property  than  their  shares.  The  aggre- 
gate capital  of  insolvent  banks,  finally  liquidated,  was  $59,622,420; 
assessments  levied,  $36,246,390;  collections  from  assessments, 
$17,616,404.  Thus  the  percentage  to  actual  collections  to  cap- 
ital is,  in  round  numbers,  about  30  per  cent.  Cf.  Table  73,  Re- 
port of  the  Comptroller  of  the  Currency,  1907. 

246 


THE  DEPOSITOR  AND  THE  BANK 

But  an  objector  will  say,  the  banks  themselves 
keep  this  fund  in  their  own  hand,  and  invest  it 
just  as  they  do  deposits.  Of  course  they  do; 
but  even  if  there  were  a  shrinkage  of  50  per  cent, 
in  the  assets  there  would  on  liquidation  still  re- 
main a  cash  fund  of  about  $i, 000,000,000,  or 
more  than  twenty  times  as  large  as  any  sum  pro- 
posed by  the  advocates  of  a  guaranty  fund.  It 
is  all  available  for  the  ultimate  liquidation  of  de- 
posits. Moreover,  in  Oklahoma,  the  State  is  re- 
depositing  the  guaranty  fund  with  the  banks. 

Next,  let  us  consider  (b)  immediate  redemption. 
No  one  is  so  extreme  as  to  propose  the  segregation 
of  a  fund  large  enough  for  the  immediate  redemp- 
tion of  all  deposits.  In  fact,  the  withdrawal  of 
any  large  sum — even  5  per  cent,  of  deposits — from 
the  banks  to  the  Treasury,  where  it  would  remain 
uninvested,  is  purely  chimerical;  and,  if  invested 
in  bonds,  it  would  be  of  no  use  as  a  cash  fund 
for  instant  use. 

Immediate  redemption  in  cash  is  impossible, 
in  any  serious  crisis,  because  cash  is,  by  the  very 
nature  of  a  crisis,  out  of  reach.  In  the  panic  of 
1907,  the  closed  banks  in  New  York  alone,  as  has 
been  before  mentioned,  had  deposits  of  about 
$100,000,000.  During  that  panic,  where  in  this 

247 


LATTER-DAY  PROBLEMS 

country  could  that  sum  in  cash  have  been  obtained  ? 
And  this  says  nothing  of  the  closed  banks  at  that 
time  in  the  rest  of  the  country.  Even  the  Treas- 
ury of  the  United  States  did  not  have  enough. 
In  fact,  it  was  itself  in  a  panic  and  planning  to  get 
the  banks  to  come  to  its  aid  when  duties  fell  off. 

If  other  than  the  failed  banks — the  latter  having 
been  badly  managed — had  been  called  upon, 
when  the  needy  business  public  were  pressing 
them  for  loans,  to  put  up  this  cash  out  of  their 
own  resources — in  addition  to  the  demands  from 
country  banks  in  the  interior — the  panic  would 
have  spread  destruction  far  and  wide.  Such  a 
guaranty  system  would  have  aggravated  every  evil. 
That  is,  just  when  sound  banks  were  stretching 
every  nerve  to  save  legitimate  business  concerns, 
they  would  have  had  their  reserves — their  means 
of  lending — reduced  enormously,  solely  to  cover 
the  mistakes  of  unsound  banks  for  whose  conduct 
they  could  in  no  sense  be  held  responsible. 

(5)  In  view  of  the  small  loss  to  depositors  in 
over  forty  years  of  the  National  Bank  System — • 
as  if  that  were  not  in  itself  a  complete  answer 
to  their  argument — the  advocates  of  a  guaranty 
fund  make  the  further  exhibit  of  ignorance  as 
to  banking  operations  by  saying:  If  this  loss 

248 


THE  DEPOSITOR  AND  THE  BANK 

is  so  small,  why  not  go  further  and  give  us 
absolute  security? 

Absolute  security,  indeed!  As  if  anything  in 
human  affairs  is  capable  of  absolute  certainty. 
Men  are  not  yet  perfect;  and  mistakes  may  be 
made  in  our  judgments  as  to  the  outcome,  not  only 
of  business,  but  even  of  political  expectations.  A 
bank  does  business  with  fallible  human  beings.  A 
borrower  of  a  bank,  when  in  the  midst  of  impor- 
tant operations,  may  die;  or  a  house  borrowing  of 
a  bank  may  have  an  embezzling  official  and  be 
crippled;  or  a  general  financial  depression  may 
unexpectedly  cut  off  collections  and  oblige  banks 
to  continue  loans  rather  than  force  failures — and 
yet,  in  view  of  all  these  things,  the  banks  are  asked 
to  give  absolute  security.  Why  not  ask  a  clergy- 
man, on  becoming  a  pastor  of  a  church,  to  give 
absolute  security  that  no  one  in  his  flock  will  ever 
tell  a  lie,  commit  an  error  in  conduct,  or  go  to 
hell  fire?  Why  not  make  the  doctors  give  a 
guaranty  that  no  patient  shall  ever  die? 

Banks,  or  any  other  business  enterprise,  can  no 
more  promise  absolute  security  than  a  father  can 
promise  the  moon  to  a  spoiled  baby.  Take  the 
case  of  a  steamship  company.  It  requires  cash, 
or  security,  for  tickets  from  its  passengers;  yet 

249 


LATTER-DAY  PROBLEMS 

it  cannot  possibly  give  absolute  security  to  them. 
It  does  a  transporting  business  dealing  with  un- 
certain elements  in  nature  and  human  beings;  it 
can  only  do  its  best  in  overcoming  the  dangers  of 
the  sea  with  the  best  obtainable  seamanship  and 
good  management.  Even  then,  in  spite  of  every 
precaution,  there  are  losses.  So  it  is  with  banks. 
There  are  inevitable  risks  involved  in  lending  idle 
funds  deposited  in  banks  to  the  active  men  who 
use  them  in  productive  industry.  There  always 
will  be  risks,  so  long  as  men  are  fallible.  That 
management  is  best  which  makes  the  least  mis- 
takes. If  you  require  absolute  security,  you  re- 
quire commercial  banks  to  become  safety  deposit 
vaults.  There  is  no  other  alternative.  The  man 
who  demands  absolute  security  writes  himself 
down  as  a  foolish  visionary  ignorant  of  practical 
business  methods. 

Those  who  demand  absolute  security  of  banks 
picture  the  disaster  to  a  community  due  to  a  bank 
failure.  Of  course  it  is  a  disaster;  and  the  men 
who  cause  it  will  not  wish  to  look  their  neighbors 
in  the  face.  But  it  is  equally  true  that  the  failure 
of  a  cotton  mill,  or  a  glucose  factory,  is  a  disaster 
to  the  community.  We  are  all  agreed  on  that; 
more  than  that,  we  are  all  agreed  on  giving  the 

250 


THE  DEPOSITOR  AND  THE  BANK 

embezzlers  and  criminals  the  full  rigor  of  existing 
law,  or  of  any  new  laws  which  will  better  reach  the 
real  author  of  the  wrong.  But  how  can  you  pre- 
vent failures  of  mills  or  banks  ?  Certainly  not  by 
penalizing  integrity  and  success. 

n 

Thus  far  we  have  taken  up  the  arguments  in 
favor  of  guaranty  of  deposits  addressed  specifi- 
cally to  the  depositors,  as  if  they  were  at  present 
not  receiving  their  rights;  and  we  have  clearly 
shown  these  arguments  to  be  based  on  astounding 
ignorance  of  banking  and  business  operations. 
Now,  we  may  next  pass  to  the  points  addressed 
directly  to  the  self-interest  of  the  bankers  them- 
selves, in  order  to  make  them  favor  a  guaranty. 

(i)  As  is  well  known,  the  scheme  to  insure  de- 
posits requires  all  banks,  good  and  bad,  to  con- 
tribute to  a  fund  to  pay  off  depositors  in  failed  in- 
stitutions. The  more  successful  the  bank,  the 
larger  its  deposits,  the  more  it  must  pay  into  the 
fund;  the  less  successful  a  bank  is  in  impressing 
the  public  with  its  security,  the  less  it  pays  into 
the  fund.  The  successful  are  to  pay  for  the  mis- 
management of  the  unsuccessful.  Let  us  expand 
slightly  the  illustration  used  in  the  last  chapter. 

251 


LATTER-DAY  PROBLEMS 

If  burglar  A  robs  B's  house,  go  to  the  most  honest 
man  in  the  village,  C,  and  rob  him  to  pay  for  B's 
loss — it  will  increase  the  eagerness  of  all  men  to  be 
honest  and  discourage  burglary!  C,  the  successful 
man,  will  enjoy  paying  for  B's  carelessness  in  keep- 
ing no  locks  on  B's  house;  and  if  C  has  to  pay  for 
all  the  deviltry  in  the  town  it  will  stimulate  others  to 
get  honest  so  that  they  can  pay  for  similar  losses. 
As  C,  who  had  nothing  to  do  with  the  case,  is 
penalized,  and  not  A,  the  burglar,  the  plan  will 
discourage  burglary.  The  scheme  is  perfect;  it 
would  work  perfectly — in  an  insane  asylum.  Mr. 
Bryan  has  well  said,  and  we  must  all  agree  with 
him:  "One  of  the  things  I  want  to  see  adopted  in 
the  form  of  regulation  [of  banks]  in  the  near 
future  is  the  law  that  will  put  the  penalty  on  the 
right  man  and  not  on  the  community."  If  the 
English  language  conveys  meaning  clearly,  those 
words  mean  that  he  favors  penalizing  the  man 
who  cheated  his  depositor  by  bad  loans  and  not 
the  man  who  protected  his  depositor  by  safe  loans. 
If  that  is  the  case,  it  is  logical  to  suppose  that  Mr. 
Bryan  is  radically  opposed  to  the  guaranty  of 
deposits. 

(2)  But,  say  the  guaranty  theorists,  depositors 
really  suffer  from  bank  failures;    and  the  only 

252 


THE  DEPOSITOR  AND  THE  BANK 

way  to  prevent  this  suffering  is  to  make  such  a 
combination  of  all  banks  as  will  force  the  good 
banks  to  watch  the  bad  banks,  knowing  that  the 
good  banks  must  pay  the  losses  unless  they  pre- 
vent failures.  Such  a  combination  is  not,  of 
course,  founded  on  equality  and  co-operation.  It 
is  a  plan  of  the  depositor,  in  case  he  makes  a  mis- 
take in  choosing  his  bank,  to  have  an  innocent 
bank  pull  the  chestnuts  out  of  the  fire  for  him. 
Of  course,  the  sound,  well-managed  bank  would 
never  draw  on  the  fund;  it  is  put  up  solely  for 
the  weak  ones. 

Let  us  for  a  moment  analyze  the  theory  that  the 
guaranty  of  deposits  would  oblige  the  sound  banks 
to  watch  the  unsound  ones,  and  thus  cause  better 
banking.  Do  its  advocates  really  know  what 
they  are  talking  about?  Is  it  possible  for  good 
banks  to  prevent  other  banks  from  making  bad 
loans?  The  fact  that  a  bank  is  making  ques- 
tionable loans  is  known  only  after  they  are  made. 
Then,  how  can  you  prevent  the  initial  act?  Ob- 
viously, only  by  establishing  a  central  organiza- 
tion of  the  best  bankers  who  should  pass  on  every 
application  for  credit  before  it  is  given  by  other 
and  smaller  banks.  But  that  is  impossible, 
visionary.  Such  a  remedy  would  be  regarded 

253 


LATTER-DAY  PROBLEMS 

by  the  smaller  bankers  as  worse  than  the  disease. 
It  would  be  like  creating  a  trust,  or  a  "money 
octopus."  In  providing  what  is  an  impossible 
remedy  for  depositors  in  time  of  failure,  it  would 
amount  to  creating  a  means  which  would  really 
destroy  existing  credit  facilities.  If  mice  trouble 
the  housekeeper,  you  would  not,  in  the  hope  of 
killing  the  mice,  import  a  tiger  that  would  devour 
the  very  housekeeper  herself. 

In  truth,  the  only  way  to  control  the  initial  act 
of  each  bank  when  making  a  loan  is  by  increasing 
in  every  possible  way  the  rewards  to  sound  and 
conservative  banking.  It  cannot  be  done  by  say- 
ing that,  if  bad  loans  are  made,  the  penalty  for 
them  shall  fall,  not  on  the  unwise  banker  who 
made  them,  but  on  the  innocent  and  wise  bankers 
who  had  nothing  whatever  to  do  with  the  bad  loans. 
That  is  dangerous  political,  as  well  as  banking, 
morals.  If  you  make  good  management  pay  for 
the  evils  of  bad  management,  you  will  take  away 
the  rewards  for  sound  banking  and  discourage 
the  growth  of  skill  and  integrity.  To  suggest  that 
sound  banks  should  pay  the  customers  of  unsound 
banks  in  cases  of  failure  puts  the  responsibility 
and  penalty  on  the  wrong  persons,  and  violates 
every  principle  of  justice  and  fairness  between  men. 

254 


THE  DEPOSITOR  AND  THE  BANK 

(3)  Every  banker  knows  that  a  bank  perma- 
nently gains  deposits  only  by  impressing  the  busi- 
ness public  with  a  belief  in  its  influential  connec- 
tions, in  its  foresight  in  meeting  financial  emer- 
gencies, and  in  its  wise  and  skilful  management. 
The  depositor  is  properly  influenced  by  these 
considerations.  But  under  a  scheme  of  guaran- 
teeing deposits,  what  would  be  the  effect? 

Bankers  of  doubtful  judgment  and  integrity 
would  find  themselves  relying  on  the  guaranty 
fund  (supplied  mainly  by  other  banks)  as  a  means 
of  attracting  deposits,  instead  of  trying  to  attract 
them  by  the  exercise  of  skilful  management.  As 
a  result,  the  deposits  of  the  country  would  be 
changed  from  a  method  of  distribution  based  as 
now  on  relative  estimates  of  wise  management,  to 
another  and  artificial  method  in  which  soundness 
of  management  would  play  no  part.  Under  this 
false  system,  deposits  would  inevitably  be  got  by 
those  who  are  less  skilled  and  honest  than  those 
who  now  hold  them.  That  is  exactly  what  the  plan 
is  contrived  to  do.  The  fundamental  mischief  in 
the  scheme  is  that  it  is  based  on  the  theory  that  all 
men  in  the  banking  business  are  equally  honest  and 
efficient.  A  theory  based  on  such  a  folly  can  never 
be  supported  by  any  but  specious  arguments. 

255 


LATTER-DAY  PROBLEMS 

(4)  The  appeal  is  sometimes  made  to  small 
banks  that  a  compulsory  insurance  fund  including 
all  banks,  large  and  small,  will  put  the  small  on 
the  same  level  as  the  large  banks,  so  far  as  accumu- 
lating deposits  is  concerned.  In  brief,  it  is  an 
appeal  to  select  a  bank,  not  on  the  strength  of  its 
management,  but  on  the  fact  that  bad  manage- 
ment will  be  paid  for  by  "the  other  fellow." 
That  is,  banks  willing  to  accept  this  appeal  are 
by  that  very  fact  to  be  distrusted;  for  they  are 
soliciting  business  on  the  theory  that  they  are  not 
to  be  trusted  because  of  their  sound  banking,  but 
because  of  a  system  under  which  they  can  escape 
due  responsibility  for  losses.  Bankers  who  would 
advertise  an  insurance  fund  to  attract  deposits 
obviously  advertise  the  fact  that  they  do  not 
expect  to  receive  deposits  primarily  on  their 
record  as  careful  bankers. 

The  guaranty  theorists  even  insist  that  success- 
ful banks  now  oppose  an  insurance  law,  because 
they  wish  to  take  advantage  of  the  insecurity  of 
badly  managed  banks,  and  to  draw  deposits 
away  from  them.  Of  course,  they  do.  Why 
not?  Should  not  an  honest  man  glory  in  his 
honesty  and  deserve  the  rewards  which  the  com- 
munity deal  out  to  honesty  ?  Does  not  an  honest 

256 


THE  DEPOSITOR  AND  THE  BANK 

and  upright  lawyer  win  a  larger  practice  over  an 
incompetent  shyster  for  exactly  those  reasons? 

(5)  As  an  example  of  what  has  just  been  ex- 
plained, we  have  the  Oklahoma  experiment. 
Some  of  the  banks  of  this  State  have  sent  out  cards 
showing  the  increase  of  their  deposits.  Two 
causes  are  supposed  to  be  at  work:  (i)  the  cessa- 
tion of  hoarding,  and  (2)  the  relatively  superior 
safety  of  Oklahoma  banks,  as  contrasted  with 
those  having  no  insurance  deposits.  As  regards 
the  first  cause  (i),  there  is  no  evidence  whatever 
but  general  opinion  regarding  the  amount  of 
money  hoarded  and  the  amount  that  comes  out 
of  hoards.  The  very  word  "hoarding"  implies 
secrecy  and  the  absence  of  knowledge  about  sums 
or  places.  But  the  rapid  movement  of  men  and 
capital  to  the  exceptional  resources  of  an  unde- 
veloped region  is  in  itself  enough  to  account  for 
increasing  deposits. 

As  regards  the  second  cause  (2),  doubtless 
some  minds  may  be  influenced  by  the  existence  of 
a  guaranty.  One  speaker  has  exulted  over  the 
case  of  an  Illinois  man  who  withdrew  $6,000  from 
an  Illinois  bank  and  deposited  it  in  one  in  Okla- 
homa in  order  to  be  more  safe.  Under  any  sys- 
tem, however,  there  are  good  and  bad  banks.  No 

257 


LATTER-DAY  PROBLEMS 

doubt  there  are  some  banks  in  Illinois  to  be  dis- 
trusted ;  and  the  sound  Illinois  banks  do  not  wish 
to  be  held  responsible  for  them.  And  the  same 
is  true,  of  course,  of  Oklahoma.  If  a  guaranty 
system  will  prevent  bank  failures,  why  is  it  that 
already  in  Oklahoma  a  failure  has  taken  place? 
Of  course,  there  is  nothing  whatever  in  the  claim, 
so  sensationally  put  forth,  that  a  guaranty  of  de- 
posits will  prevent  failures.  There  will  be  good 
and  bad  banking  in  Oklahoma  under  a  guaranty 
system.  If  there  were  not  certain  to  be  bad  bank- 
ing there,  then  why  was  the  act  passed?  Solely 
to  make  the  good  pay  for  the  bad.  Any  banker 
who  advocates  a  guaranty  must  know  that  he  is 
advocating  an  unjust  scheme.  No  legislation  will 
make  every  banker  in  Oklahoma,  or  anywhere 
else,  honest  and  skilful.  Some  are  certain  to  be 
weak  and  inefficient  under  any  system.  The 
whole  question  is:  who  shall  pay  for  their  mis- 
takes? Obviously,  we  all  agree  with  Mr.  Bryan 
in  insisting  that  the  penalty  shall  be  put  "on  the 
right  man  and  not  on  the  community."  The 
"right  man"  is  clearly  not  the  man  who  has  won 
success  in  gathering  deposits  by  the  exercise  of 
honor  and  discretion  in  his  business.  And  no 
amount  of  special  pleading  can  induce  us  to  put 

258 


THE  DEPOSITOR  AND  THE  BANK 

the  penalty  on  him.  But  the  guaranty  of  deposits 
is,  by  its  very  nature,  intended  to  put  the  penalty 
on  him.  And,  finally,  the  Attorney-General  has 
ruled  that  national  banks  in  Oklahoma  cannot  go 
into  the  business  of  insuring  other  bankers,  since 
it  is  a  business  foreign  to  their  banking  charters. 
Consequently  a  ruling  in  accordance  with  that 
opinion  has  been  made  by  the  Comptroller  of  the 
Currency.  It  is  for  the  depositor,  not  the  bank,  to 
seek  an  insurance  company  chartered  to  take 
such  risks. 

It  is  said  that,  as  we  have  insurance  for  plate 
glass,  for  houses,  and  for  life,  we  can  rightly  have 
insurance  for  deposits.  That  is  clear:  we  agree. 
In  life  insurance  the  man  whose  life  is  insured 
pays  the  premium;  he  never  asks  his  neighbor, 
who  is  not  insured,  to  pay  his  premium  for  him. 
So,  to  make  the  case  parallel,  the  depositor  should 
pay  the  premium.  That  is  a  business  not  a 
political  proposition.  If  so,  companies  insuring 
deposits  would  charge  a  high  rate  for  deposits  in 
badly  managed  banks  and  a  low  rate  in  well- 
managed  banks.  That  would  mighty  soon  sepa- 
rate the  sheep  from  the  goats. 

(6)  The  persistent  failure  to  understand  the 
patent  facts  of  banking  is  disclosed,  also,  in  the 

259 


LATTER-DAY  PROBLEMS 

contention  that  a  guaranty  system  would  discour- 
age reckless  banking.  In  what  manner  is  it 
thought  it  will  discourage  making  bad  loans? 
By  proposing  to  watch  the  paper  offered  to  banks  ? 
Not  at  all.  What,  then,  is  the  argument  for  this 
pure  theory?  "Under  this  plan  of  securing  the 
depositor,  the  stockholder  loses  all  that  he  has, 
before  any  other  bank  loses  anything.  Not  only 
does  he  lose  all  his  stock,  he  also  loses  the  penalty 
that  the  law  fixes,  and  the  loss  of  the  stock  and 
the  penalty  are  enough  to  make  him  exercise  care" 
— says  Mr.  Bryan.  It  really  amazes  one  to  find 
any  one  so  ignorant  of  our  national  system  as 
this,  and  yet  this  statement  comes  from  one  who 
does  not  hesitate  to  instruct  and  to  threaten  the 
bankers.  Is  it  possible  he  does  not  know,  as  we 
have  already  explained,  that  under  existing  law 
every  bank  must  itself  first  lose  all  its  capital,  sur- 
plus, undivided  profits,  and  stockholders'  liability, 
if  it  is  guilty  of  gross  mismanagement,  before  the 
depositor  loses?  Then,  from  Mr.  Bryan's  point 
of  view,  just  as  things  are  to-day,  we  have  all  the 
conditions  to  insure  vigilance  just  as  well  as  if  we 
had  the  much-vaunted  guaranty  of  deposits. 
Now,  why  is  this  argument  of  the  guaranty  theo- 
rists so  obviously  ridiculous  ?  Solely  because  they 

260 


THE  DEPOSITOR  AND  THE  BANK 

do  not  understand  that  already,  as  things  are  now, 
the  banks  provide  a  guaranty  for  the  ultimate 
redemption  of  deposits  in  their  capital,  surplus, 
profits,  and  stockholders'  liability.  The  only  fea- 
sible guaranty  system  is  now  in  use. 

(7)  Indeed,  the  origin  of  the  guaranty  idea  is 
traceable  either  to  the  general  prejudice  against 
banks  or  to  the  attempt  to  make  men  good  by  law. 
It  is  purely  populistic,  or  socialistic,  in  its  parent- 
age. On  the  one  hand  (i),  it  seems  to  be  based 
on  the  belief  that  banks  are  rich  and  ought  to  bear 
the  burdens  of  the  unsuccessful.  If  some  banks 
are  badly  managed,  then  make  the  whole  rich 
banking  fraternity  bear  the  losses.  Thus,  by  hook 
or  by  crook,  no  matter  whether  the  system  is  just 
or  unjust,  the  bankers  will  have  to  get  out  of  it 
among  themselves  the  best  way  they  can.  They 
can  stand  it  better  than  anybody  else.  Let  the 
moral  question  go  hang.  In  the  second  place  (2), 
the  plan  is  an  attempt  falsely  to  make  one  bank  as 
good  as  another  by  law,  when  we  all  know  that  by 
nature  they  must  differ  with  differences  in  skill  and 
integrity.  If  you  will  carefully  watch  those  who 
support  the  guaranty  system  it  will  be  found  that 
they  are  appealed  to  by  the  socialistic  quality  in  it. 
The  essential  thing  in  socialism,  as  I  have  had  occa- 

261 


LATTER-DAY  PROBLEMS 

sion  elsewhere  *  to  explain,  is  the  attempt  to  throw 
on  the  State  the  responsibility  for  failure  to  succeed 
in  the  open  competition  of  men  with  men.  The 
unsuccessful  bank  may  have  a  grudge  against  the 
successful  one;  and  then  it  is  easy  to  get  favor 
for  a  law  which  would  help  them  to  escape  the 
results  of  their  own  failure  to  succeed  and  to 
draw  down  to  their  own  level  those  who  have  suc- 
ceeded. In  reality,  there  is  only  one  royal  road 
to  large  deposits:  that  lies  through  skill,  integ- 
rity, good  management,  and  time  enough  to  en- 
able the  public  to  learn  of  the  existence  of  these 
qualities. 

(8)  Let  us  further  analyze  the  practical  work- 
ing of  this  matter.  Suppose  a  bank  accepts  the 
theory  of  its  advocates  that  the  guaranty  of  de- 
posits will  prevent  all  runs;  that,  since  the  de- 
positor is  wholly  protected,  he  will  not  withdraw 
his  funds  in  a  crisis.  Obviously  a  plan  which 
makes  the  banker  think  there  will  be  no  demand 
for  cash  reserves  in  a  panic  will  take  away  the 
necessity  of  forcing  him  to  carry  only  such  assets 
as  are  quickly  and  surely  convertible  into  cash  in 
an  emergency.  Under  this  scheme  there  will  be  no 
need  of  having  good  assets  to  offer  to  outside 

1  Chapter  II. 
262 


THE  DEPOSITOR  AND  THE  BANK 

banks  for  assistance  when  hard  pressed.  Thus, 
from  another  direction  we  reach  the  conclusion 
that  the  plan  will  remove  the  safeguards  against 
reckless  banking. 

(9)  More  than  that,  the  claim  that  insurance  of 
deposits  will  prevent  panics,  because  it  will  prevent 
runs  by  depositors,  discloses  a  curious  theory  of 
the  causes  of  commercial  crises.  In  fact,  it  has 
actually  been  said  that  the  only  reason  why  banks 
suspended  was  because  they  were  afraid  of  runs 
by  depositors.  This  point  was  lightly  touched 
upon  in  the  last  chapter,  but  it  needs  further  analy- 
sis. Does  a  man's  withdrawal  of  deposits  cause 
a  crisis,  or  does  the  existence  of  a  crisis  and  dis- 
trust cause  the  withdrawal  ?  Which  is  cause,  and 
which  is  effect?  The  existence  of  a  crisis  and 
distrust  comes  from  loading  up  with  speculative 
ventures  or  assets  which  have  lost  their  basis 
of  value.  Extravagance,  over-confidence,  undue 
expansion  of  trade  based  on  borrowing,  prices 
raised  to  an  undue  height  under  a  fictitious  de- 
mand, speculation  for  raising  prices  of  goods  and 
stocks  are,  if  wide-spread,  the  causes  of  panics. 
The  effect  of  a  sudden  knowledge  of  this  unsub- 
stantial credit,  when  tested  by  some  unexpected 
demand  for  liquidation,  brings  on  a  crisis.  The 

263 


LATTER-DAY  PROBLEMS 

run  on  a  bank  is  only  one  of  the  manifestations 
of  a  fever  which  has  already  seized  upon  the 
whole  business  organism.  One  might  as  well 
say  that  the  patient's  temperature  is  the  cause  of 
his  illness,  as  to  say  that  a  run  is  the  cause  of  a 
panic. 

In  actual  fact,  if  a  bank  has  been  soundly 
managed,  if  its  assets  are  sound,  a  bank  cannot 
fail,  even  if  a  run  on  it  is  started.  "I  have  been 
forty  years  in  the  business,"  says  one  of  the  most 
successful  bankers  in  this  country,  "and  I  cannot 
recall  a  single  case  of  the  failure  of  a  sound  bank 
that  could  be  attributed  to  an  unwarranted  run 
on  it  by  depositors.  If  its  assets  are  good,  it  can 
always  obtain  cash,  or  assistance.  If  soundly 
managed,  it  will  have  reserves  enough  to  meet 
any  foolish  run;  or  it  could  borrow  on  its  con- 
vertible assets." 

Now,  we  have  a  right  to  ask,  in  what  way  could 
a  scheme,  which  would  lay  the  burdens  of  rash 
banking  upon  sound  banking,  stop  a  panic  due 
to  causes  reaching  back  into  the  past?  As  well 
say  that  a  mustard  poultice  applied  to  a  fever 
patient  had  prevented  his  having  had  any  fever 
at  all.  This  claim  of  the  insurance  advocates  is 
quackery,  to  say  the  least.  The  guaranty  fund 

264 


THE  DEPOSITOR  AND  THE  BANK 

would,  in  fact,  not  check  runs  at  all.  Why? 
Because,  even  in  case  of  a  run,  the  guaranty  fund 
could  not  be  drawn  upon  until  a  bank  had  failed. 
Moreover,  if  there  were  a  guaranty  fund,  and  if 
runs  were  general,  and  many  banks  failed,  the  main 
body  of  depositors  would  not  get  their  cash  im- 
mediately, but  only  after  liquidation — sooner  if 
assets  were  good,  longer  if  assets  were  poor.  Un- 
less a  fund  exists  large  enough  for  immediate 
redemption  of  all  deposits  of  all  failed  banks  in 
any  serious  crisis — an  impossible  supposition,  as 
we  have  shown — then  the  depositor  must  know 
that  some  delay  in  drawing  on  the  guaranty  fund 
would  be  inevitable.  If  so,  and  if  he  is  filled  with 
a  panicky  desire  to  have  his  money  at  once,  such 
a  depositor  will  try  to  withdraw  his  funds  just 
as  certainly  under  the  guaranty  scheme  as  he 
would  do  it  now.  For,  as  matters  now  stand,  the 
insurance  advocates  must  admit  the  existence  of  a 
large  guaranty  fund  for  the  ultimate  payment  of 
deposits.  In  brief,  as  a  result  of  our  analysis,  the 
guaranty  scheme  is  proved  to  be  founded  on  a 
foolish  theory  of  panics,  and  on  an  utter  mis- 
understanding of  the  facts  of  trade  and  banking. 
(10)  Not  having  any  substantial  basis  in  knowl- 
edge of  proper  banking  operations,  the  guaranty 

265 


LATTER-DAY  PROBLEMS 

scheme  has  been  ingeniously  urged  upon  bankers 
because  of  the  peculiar  relations  of  national  banks 
to  State  banks.  Of  course,  a  Federal  law  would 
not  cover  the  action  of  State  banks,  and  vice  versa. 
Now  it  is  proposed  to  urge  the  Federal  guaranty 
law  on  the  ground  that,  in  any  one  State,  such  as 
Oklahoma,  Kansas,  or  Nebraska,  a  State  guaranty 
law  would  force  the  national  banks  to  come  in  or 
lose  their  deposits.  Hence,  the  only  way  to  pro- 
tect the  national  banking  system  against  the  en- 
croachments of  one  or  several  States  is  to  pass 
a  Federal  law  for  a  guaranty  of  all  national  bank 
depositors. 

Now,  let  us  face  this  proposal  in  a  practical 
business  way.  (i)  Suppose  a  national  guaranty 
law  were  passed.  Then,  on  the  theory  of  its 
advocates,  the  deposits  would  leave  the  banks  in 
all  States  having  no  guaranty  law  and  go  to  the 
national  banks.  In  that  case,  the  law  would 
work  an  injury  to  every  honest  State  bank.  Ob- 
viously, then,  the  State  bankers  ought  to  be  op- 
posed to  the  scheme,  so  far  as  their  interests  are 
affected.  But,  say  the  guaranty  theorists,  in  that 
case  every  State  would  be  obliged  to  pass  a  guar- 
anty law  also.  If  that  followed,  of  course  the 
State  and  national  banks  would  stand  relatively 

266 


THE  DEPOSITOR  AND  THE  BANK 

to  each  other  just  where  they  do  now;  and  there 
would  be  no  gain  to  any  bank  in  either  class. 
The  result  would  be  nil,  except  that  good  banks, 
both  State  and  national,  would  now  have  to  carry 
the  losses  of  bad  banks. 

But  (2)  suppose  some  States,  like  Oklahoma, 
Texas,  Kansas  and  Nebraska,  inclined  to  popu- 
lism, adopted  a  guaranty  system.  Then  other 
States,  having  a  more  just  view  of  their  duty  to 
careful  banking,  would  not  adopt  it.  As  a  con- 
sequence we  should  have  as  endless  confusion  as 
between  State  bankruptcy  laws.  Now,  are  clear- 
headed business  men,  with  their  eyes  open,  likely 
to  urge  a  law  certain  to  create  a  confusion  in 
business  relations  with  correspondents  in  different 
States  compared  with  which  present  conditions 
would  be  like  paradise?  I  think  not. 

The  less  likely  is  this  to  happen,  when  the 
scheme  of  guaranteeing  deposits  is  clearly  recog- 
nized to  be  only  an  artificial  method  of  trying  to 
place  all  banks,  good  and  bad,  on  the  same  level, 
and  a  scheme,  too,  which  leaves  out  the  necessity 
of  enforcing  sharp  responsibility  for  making  only 
safe  loans.  We  might  be  willing  to  face  tem- 
porary confusion  for  the  sake  of  a  great  moral 
principle,  but  surely  there  can  be  little  reason  for 

267 


LATTER-DAY  PROBLEMS 

creating  trouble  solely  for  the  sake  of  an  immoral 
delusion.  I  say  "delusion,"  because  if  such  a 
system  were  introduced  it  would  be  only  an  arti- 
ficial method  of  making  all  banks  equally  good. 
In  reality,  with  or  without  a  guaranty  system,  the 
only  sure  test  of  the  safety  of  a  bank  is  in  the  qual- 
ity of  its  management.  From  whatever  point  we 
start  we  inevitably  come  back  to  this  primary 
truth. 

(n)  In  order  to  force  bankers  to  accept  a 
guaranty  law,  however,  a  threat  is  made  that,  if 
they  do  not,  they  must  expect  a  postal  savings 
law.  Here  the  argument  is  addressed  to  the 
fear  of  losing  deposits.  Those  who  think  this 
threat  is  formidable  obviously  fail  to  distinguish 
between  a  savings  bank  and  a  commercial  bank. 
If  a  postal  savings  law  were  adopted,  it  would 
affect,  in  the  main,  only  the  uninformed  small  de- 
positors who  hoard,  or  who  distrust  the  local 
savings  bank.  In  the  nature  of  things  such  a 
system  could  not  attract  the  large  mass  of  deposits 
left  with  the  commercial  banks  by  active  business 
men,  for  one  overwhelming  reason.  A  true  com- 
mercial bank  exercises  both  the  functions  of  de- 
posit and  discount — the  issue  function  not  being 
essential.  Now,  if  a  depositor  is  in  trade,  or  if 

268 


THE  DEPOSITOR  AND  THE  BANK 

he  is  one  who  may  need  loans,  he  is  by  that  fact 
estopped  from  keeping  his  funds  with  a  Govern- 
ment postal  agency,  from  which  he  cannot  bor- 
row on  short  time.  Exactly  because  the  Govern- 
ment is  not  a  bank,  and  ought  not  to  be,  it  will 
not  receive  the  checking  accounts  which  are  gen- 
erally left  with  banks  on  the  understanding  that 
credit  will  be  given  when  needed. 

Therefore,  when  a  guaranty  advocate  rises  to  a 
rhetorical  climax  by  threatening  the  banks  not 
only  with  the  loss  of  small  savings  accounts — 
which  are  not  profitable  to  a  bank,  anyway — but 
also  the  probable  extension  of  the  savings  deposit 
limit  from  a  beginning  at  $500  to  a  higher  limit, 
which  would  include  the  checking  accounts  of 
merchants,  he  is  advertising  his  dulness  of  mind. 
The  country  ought  to  be  distrustful  of  quacks 
who  offer  people  their  nostrums,  that  are  about 
as  much  to  the  purpose  as  paregoric  for  making 
hens  lay  eggs. 

(12)  Finally,  the  worst  monetary  fallacy  in  the 
arguments  of  the  guaranty  theorists  is  involved 
in  the  claim  that,  if  established,  the  system  would 
draw  so  much  money  into  the  banks  as  to  remove 
all  necessity  of  creating  an  emergency  circulation. 
The  error  here  is  in  confusing  property,  or  goods, 

269 


LATTER-DAY  PROBLEMS 

with  the  medium  of  exchange  by  which  the  goods 
are  exchanged.  No  matter  how  much  actual 
coin  is  hoarded;  no  matter  the  cause  which  brings 
it  out  into  bank  reserves — the  actual  deposits 
then  require  only  the  usual  proportion  of  reserves; 
and  when  the  banks  reach  that  proportion,  extra 
coin  is  disposed  of  just  as  quickly  as  a  farmer  sells 
his  surplus  wheat.  After  that,  banking  goes  on 
just  as  before  the  arrival  of  the  hoard.  But 
what  next  ?  If  a  panic  appears  next,  there  would 
be,  as  a  consequence,  just  the  same  need — be  it 
more  or  less — for  an  emergency  circulation  after 
the  establishment  of  a  guaranty  system  as  there 
would  have  been  before.  An  emergency  in  busi- 
ness conditions  due  to  an  over-expansion  of  credit 
will  come  and  go  for  reasons  entirely  dissociated 
with  the  insurance  of  deposits — that  is,  if  we  may 
suppose  that  human  nature  remains  the  same  after 
such  a  system  is  put  into  operation.  In  fact,  the 
idea  that  the  quantity  of  money  in  existence  is  of 
chief  importance,  as  distinct  from  the  quantity  of 
salable  goods  on  which  loans  and  deposits  are 
based,  is  but  the  old  greenback  fallacy  in  a  new 
disguise.  It  overlooks  the  clear  truth  that  as  sal- 
able goods  increase  there  is  increased  the  basis 
for  legitimate  loans  by  banks;  that  these  loans 

270 


THE  DEPOSITOR  AND  THE  BANK 

result  in  deposits  on  which  checks  are  drawn; 
and  that  thus  the  banks  are  constantly  affording 
a  deposit-currency  to  the  public  as  an  elastic 
medium  of  exchange.  Let  those  who  think  an 
elastic  and  enlarging  currency  is  desirable  begin 
to  be  grateful  to  the  marvellous  service  rendered 
by  the  banks  in  exchanging  over  150,000  million 
dollars  of  goods  every  year.  Greenbacks,  and  even 
bank-notes,  are  far  behind  in  this  comparison  of 
work  done  by  our  different  media  of  exchange. 

In  conclusion,  we  have  heard  much  of  the  banks 
and  the  piece  of  old  carpet;  and  that  bankers 
should  be  ashamed  to  have  the  old  carpet  rival 
them  in  the  minds  of  depositors  as  a  safe  place  of 
deposit.  If  a  man  were  pursued  by  a  bull,  and 
obliged  to  take  to  a  tree,  he  is  not  fool  enough  to 
get  down  before  the  bull  and  try  to  hide  in  the 
bushes,  where  peril  awaits  him.  To  do  this  would 
be  as  foolish  as  to  withdraw  his  money  from  a 
sound  bank  and  hide  it  under  a  carpet,  where 
fire  or  robbery  may  carry  it  off.  A  sound  bank, 
depending  not  on  artificial  stimulants  like  in- 
surance of  deposits,  but  on  wise  management,  for 
its  business,  never  has  had  and  never  will  have 
any  rivalry  with  a  piece  of  carpet  or  any  other 
place  of  hoarding. 

271 


LATTER-DAY  PROBLEMS 

In  way  of  summary,  we  may  say  then  that  the 
guaranty  of  deposits  appears  in  these  days  chiefly 
because  it  is  a  political  appeal  to  15,000,000  de- 
positors, although  on  an  impossible  and  imprac- 
ticable basis;  and  that  it  is  an  appeal  to  bankers 
and  stockholders  on  the  ground  of  self-interest, 
when  in  reality  it  is  an  emphasis  on  a  wrong 
incentive,  and  will  result  in  reckless  banking. 


272 


CHAPTER  X 
GOVERNMENT   VS.  BANK  ISSUES 

TT7HILE  the  problem  of  the  standard  in  the 
V  V  United  States  is  largely  settled,  other  mon- 
etary questions  of  great  importance  confront  us. 
Certain  forms  of  our  media  of  exchange,  ultimately 
redeemable  in  the  standard  coin,  may  be  issued 
either  by  the  Government  or  by  the  national  banks 
chartered  by  the  Government.  Viewed  in  the 
light  of  wisdom  and  experience,  should  these  notes 
be  emitted  by  the  general  Government  or  by  the 
banks?  That  is  the  next  great  monetary  ques- 
tion. It  is  certainly  a  momentous  one  deserving 
impartial  examination.  We  may  then  weigh  the 
arguments  (i)  for  and  (2)  against  Government  is- 
sues and  those  (3)  against  and  (4)  for  bank  issues. 


(i)  Leaving  out  of  account  inconvertible  paper, 
it  has  been  claimed  that  the  issue  of  convertible 
paper  by  the  general  Government  would  be  a  sav- 

273 


LATTER-DAY  PROBLEMS 

ing  to  the  people.  The  idea  is  that  in  issuing 
paper  money  a  profit  exists  which  should  be 
reaped  by  the  State.  Obviously,  every  country 
must  invest  a  certain  part  of  its  wealth  in  its 
machinery  of  exchange;  and  it  is  economy  to 
keep  this  investment  as  small  as  possible  con- 
sistent with  the  highest  efficiency .  Convertible 
paper  is  resorted  to,  not  because  of  a  scarcity  of 
gold,  but  because  it  saves  the  expense  of  using 
gold ;  since  the  reserves  for  preserving  convertibility 
need  not  be  more  than  40  or  50  per  cent.  The  in- 
terest on  the  difference  between  the  total  amount 
of  paper  and  the  reserves,  therefore,  represents 
the  saving  in  question.  This  difference  can  be  set 
free  to  be  used  in  industry,  and  the  earnings  on  it 
constitute  the  country's  saving  in  issuing  paper  in 
place  of  gold.  The  saving,  of  course,  is  only  the 
interest,  not  the  whole  of  the  difference. 

The  validity  of  this  theory  can  be  tested  by  our 
actual  experience  with  the  greenbacks,  which  were 
inconvertible  from  1862  to  1878,  and  convertible 
from  1879  to  the  present  time.  Assuming  a  re- 
serve, as  at  present,  of  $150,000,000  in  gold  to  be 
necessary  for  the  redemption  of  our  $346,681,016 
of  greenbacks,  we  may  say,  in  round  numbers,  that 
$200,000,000  is  the  amount  of  the  uncovered  issues, 

274 


GOVERNMENT  VS.  BANK  ISSUES 

on  which  the  interest  at  3  per  cent,  (at  which  any 
gold  bond  could  be  easily  floated)  would  be  $6,000,- 
ooo.  This  last  sum  represents  the  annual  gross 
gain  to  the  people  if,  on  other  grounds,  it  should 
be  regarded  as  best  to  supplant  a  gold  currency  by 
a  convertible  paper  issued  by  the  Government.1 

Immediately,  however,  the  question  is  raised: 
Does  it  cost  anything  to  maintain  the  reserve? 
Of  course,  the  political  or  financial  management 
of  the  State,  whether  good  or  bad,  will  directly 
influence  the  ability  of  the  State  to  keep  its  re- 
serves intact.  Any  policy  which  excites  distrust 
as  to  the  willingness  or  ability  of  the  Treasury  to 
redeem  its  paper  in  gold  will  create  activity  in  the 
presentation  of  its  notes  for  coin.  Only  on  the 

1  In  reality,  the  gain  from  using  the  convertible  paper  is  not  a 
positive  gain,  but  only  the  reduction  of  a  loss.  Suppose  all  the 
wealth  of  the  country  to  be  earning  3  per  cent.  Take  out  of  this 
total  the  sum  of  $350,000,000,  which  is  used  in  the  form  of  a  gold 
currency,  and  while  so  used  yields  no  concrete  returns.  The 
total  loss,  or  price,  which  the  country  pays  for  a  currency  consist- 
ing entirely  of  gold  is  the  3  per  cent,  on  this  $350,000,000,  or 
$10,500,000.  But,  if  this  $350,000,000  is  partly  economized  by 
using  $200,000,000  of  convertible  paper,  $200,000,000  is  released 
to  go  back  to  productive  industry;  hence  the  loss  to  the  com- 
munity is  reduced  to  3  per  cent,  on  $150,000,000,  or  only  $4,500,- 
ooo.  The  so-called  gain  of  $6,000,000  annually,  which  is  the 
3  per  cent,  on  the  $200,000,000  released,  is  not  a  positive  gain; 
it  is  only  a  reduction  of  the  total  loss. 

275 


LATTER-DAY  PROBLEMS 


assumption  that  the  Government  will  always  be 
wise  and  capable  will  the  reserves  always  remain 
intact.  If  not,  the  reserves  will  be  drawn  down, 
and  new  loans  must  be  made  in  order  to  supply 
additional  gold  for  the  reserves.  But  our  monetary 
policy  has  not  always  been  wise :  it  has  often  been 
cranky,  foolish,  and  most  ill-judged.  Our  na- 
tional vagaries  with  silver  are  known  the  world 
over.  Hence,  it  is  but  inevitable  that  the  people 
should  have  had  to  pay  the  price.  In  truth,  so 
often  and  great  was  the  fear  that  we  could  not 
maintain  gold  payments  that  several  times  the 
gold  reserves  were  almost  exhausted.  Our  fool- 
ishness reduced  to  figures  means  that,  to  maintain 
a  reserve  for  $346,681,016  greenbacks,  we  have 
had  to  increase  the  public  debt  by  $357,815,400, 
on  which  the  additional  interest  charges  to  the 
tax-payer  are  $i5,632,6i6.1  Thus,  as  against  the 


AMOUNT  OP 
DEBT  CREATED 

RATE  OF 
INTEREST  % 

INTEREST 
CHARGE 

1877-78  .  . 

(  $65,000,000 

4 

$2,920,000 

Feb  i  1894  

(    30,SOO,000 

50,000  ooo 

4 

c 

I,22O,OOO 
2.5OO.OOO 

Nov.  13,  1894  
Feb.  8,  1895  

50,000,000 
62,^1?,  400 

5 
4 

2,500,000 
2,492,616 

Feb  15  1896  

100,000,000 

4 

4,000,000 

Total  

S^<7,8lC.4OO 

$15,6^2.616 

276 


GOVERNMENT  VS.  BANK  ISSUES 

reduction  of  loss  by  $6,000,000,  the  issues  of  the 
Government  have  entailed  an  enormous  annual 
expense  of  $15,632,616.  It  does  not  do  to  base 
expectations  solely  on  theory.  Indeed,  it  is  a 
serious  question  whether  our  governing  class  is 
sufficiently  intelligent  in  managing  monetary  mat- 
ters to  allow  our  nation  to  issue  paper  money  ex- 
cept at  a  fearful  cost  to  the  people. 

But  the  above  statement  of  the  cost  is  not  all. 
The  iniquitous  act  of  March  31,  1878,  required 
that  the  notes  redeemed  by  such  a  vast  increase 
of  debt  should  be  reissued.  This  is  the  act 
which  created  the  "endless  chain"  and  the  con- 
stant drain  on  the  Treasury  in  time  of  danger. 
Consequently  we  have  the  silly  result  of  having 
actually  redeemed  more  than  $407,000,000  of 
greenbacks,  by  an  increase  of  debt  ($357,815,400) 
greater  than  the  total  original  issues  of  the  green- 
backs— and  yet  we  have  the  whole  amount  still 
outstanding!  It  sounds  childish,  but  it  is  literally 
true.  In  fact,  if  we  had  borrowed  the  $346,68 1 ,01 6 
by  issuing  4-per-cent.  bonds,  at  the  time  of  resump- 
tion, the  annual  interest  charge  would  have  been 
only  $13,876,240,  or  an  annual  saving  of  $1,765,376 
on  the  interest  of  the  debt  actually  incurred  in 
keeping  up  the  reserves.  If  the  rate  of  interest  on 

277 


LATTER-DAY  PROBLEMS 

the  bonds  had  been  3  per  cent.,  the  saving  would 
have  been  still  greater.  On  the  face  of  experi- 
ence, at  least  in  the  United  States,  it  can  scarcely 
be  urged  that  there  is  any  gain  to  the  people  in 
issuing  Government  notes. 

(2)  Still  many  persons  think  that  Government 
notes  are  "a  loan  without  interest,"  and  hence  a 
saving  to  the  State.  So  well-known  a  politician 
as  Secretary  Sherman  thought  so  *;  but  the  facts 
already  given  remove  the  whole  basis  for  this 
opinion.  It  never  has  been  shown  that  the  Treas- 
ury was  unable  to  borrow  at  some  rate  at  the  time 

1  "United  States  notes  are  now,  in  form,  security,  and  con- 
venience, the  best  circulating  medium  known.  The  objection  is 
made  that  they  are  issued  by  the  Government,  and  that  it  is  not 
the  business  of  the  Government  to  furnish  paper  money,  but 
only  to  coin  money.  The  answer  is  that  the  Government  had  to 
borrow  money,  and  is  still  in  debt.  The  United  States  note,  to 
the  extent  that  it  is  willingly  taken  by  the  people,  and  can,  be- 
yond question,  be  maintained  at  par  in  coin,  is  the  least  burden- 
some form  of  debt.  The  loss  of  interest  in  maintaining  the  re- 
sumption fund,  and  the  cost  of  printing  and  engraving  the  present 
amount  of  United  States  notes,  are  less  than  one-half  the  interest 
on  an  equal  sum  of  four-per-cent.  bonds.  The  public  thus  saves 
over  seven  million  dollars  of  annual  interest,  and  secures  a  safe 
and  convenient  medium  of  exchange,  and  thus  the  assurance 
that  a  sufficient  reserve  in  coin  will  be  retained  in  the  Treasury 
beyond  the  temptation  of  diminution,  such  as  always  attends 
reserves  held  by  banks." — Report  0}  Secretary  oj  Treasury,  1880, 
p.  xv. 

278 


GOVERNMENT   VS.  BANK  ISSUES 

(1862)  when  the  first  greenbacks  were  issued,  or 
at  any  time  since.  Moreover,  if  a  State  must 
borrow,  it  is  egregious  folly  to  borrow  in  the  form 
of  paper  money,  which  may  easily  disturb  the 
standard  of  value,  change  contracts,  cause  an  up- 
heaval of  prices,  and  create  riotous  speculation. 
Indeed,  a  loan  put  out  in  the  form  of  demand 
notes  is  highly  objectionable  as  compared  with  a 
loan  in  the  form  of  bonds  issued  for  a  term  of 
years.  The  demand  obligations  may  be,  and 
generally  are,  presented  in  times  of  distrust  and 
danger,  just  when  their  redemption  by  the  Treasury 
is  most  difficult,  and  when  their  conversion  adds 
to  the  severity  of  a  crisis.  On  the  other  hand,  a 
loan  on  time  in  the  form  of  bonds  gives  no  trouble 
beyond  the  payment  of  interest,  and  is  not  turning  up 
at  critical  emergencies  to  be  redeemed.  Even  if  the 
cost  to  the  people  of  both  methods  were  the  same, 
the  latter  method  of  borrowing  should  be  recom- 
mended on  every  ground  of  theory  and  experience. 
Indeed,  the  confusion  of  mind  between  the  fiscal 
and  the  monetary  functions  of  the  Treasury  should 
be  widely  separated.  But  of  this  more  later  on. 

(3)  In  favor  of  Government  issues  is  the  obvious 
claim  that  they  would  be  uniform  throughout  the 
different  States  of  the  Union,  and  prevent  the  con- 

279 


LATTER-DAY  PROBLEMS 

dition  of  variety  and  depreciation  which  existed 
in  the  State  currencies  before  the  Civil  War. 
But  this  admitted  advantage  in  favor  of  Govern- 
ment notes  is  no  argument  against  bank-notes, 
if  the  latter,  as  in  the  case  of  the  national  bank-notes, 
can  also  be  made  safe,  redeemable,  and  uniform 
throughout  the  whole  country. 

(4)  A  more  interesting  point  in  favor  of  Govern- 
ment issues  is  the  suggestion  that  bank-notes  are 
unconstitutional.  Obviously  this  point  has  no 
reference  to  banks  chartered  by  the  national  Gov- 
ernment. That  issue  was  settled  long  ago,  in 
iSig.1  If  the  claim  has  any  relevancy,  it  has  it 
only  in  regard  to  notes  issued  by  banks  chartered 
by  the  several  States.  The  Constitution  forbids 
States  to  emit  bills  of  credit,  but  it  does  not  forbid 
a  State  to  incorporate  banking  institutions.  In 
constant  practice,  from  the  beginning,  State  banks 
have  been  allowed  to  issue  notes.  Webster  urged 
that  the  power  of  the  general  Government  to 
regulate  coinage  included  the  right  to  supervise 
all  State  bank  issues;  and  the  right  of  Congress 
to  regulate  the  issue  of  State  banks,  or  tax  them 
out  of  existence,  has  also  been  settled.2  Therefore, 

1  Veazie  Bank  vs.  Fenno,  8  Wallace,  533. 
1  McCullock  vs.  Maryland,  4  Whcaton,  316. 
280 


GOVERNMENT  VS.  BANK  ISSUES 

all  there  is  in  this  objection  applies  only  to  notes 
of  State  banks,  and  in  no  way  affects  the  right  of 
national  banks  to  issue  notes  under  an  act  of 
Congress. 

Having  thus  examined  the  arguments  in  favor 
of,  we  may  next  proceed  to  consider  those  against, 
Government  issues. 

n 

(5)  Without  doubt,  the  least  recognized,  and 
yet  the  most  far-reaching,  consideration  involved 
in  discussing  Government  issues  is  the  failure  to 
separate  the  monetary  from  the  fiscal  functions  of 
the  Treasury.  Almost  all  our  monetary  ills  from 
1862  to  1900  can  be  traced  to  it.  The  crude  idea 
that,  when  funds  were  needed,  they  could  be  ob- 
tained by  issuing  demand  obligations  bearing  no 
interest,  which  could  be  circulated  as  money,  has 
long  been  prevalent,  and  has  produced  no  end  of 
trouble.  Ignorant  of  the  principles  regulating  the 
monetary  system  of  a  country,  the  Treasury  might, 
solely  from  a  need  of  income  which  had  no  relation 
whatever  to  the  demands  of  trade  for  a  medium  of 
exchange,  inject  additional  sums  of  money  into  the 
circulation,  and  upset  the  whole  delicate  machinery 
of  exchanging  goods.  Foolishly  to  unsettle  the 

281 


LATTER-DAY  PROBLEMS 

monetary  standard  and  the  confidence  of  the  public 
by  trying  to  borrow  in  a  form  certain  to  interfere 
with  the  nation's  currency  is  only  a  way  of  crip- 
pling the  power  to  borrow  in  general.  Thus, 
two  evils  result  from  this  fateful  confusion  of 
mind:  (i)  changing  the  supply  of  money  without 
any  adjustment  to  the  needs  of  trade  is  a  blow  at 
the  very  vitals  of  exchange,  prices,  contracts,  and 
business  security;  and  (2)  the  credit  of  the  Treas- 
ury being  dependent  on  its  management  and  re- 
sources, the  issue  of  paper  money  is  a  blow  at 
credit,  because  it  is  an  open  confession  of  inability 
to  borrow  in  the  market  on  normal  conditions. 
Since  the  government,  in  1862,  when  borrowing 
had  not  yet  been  fully  tried,  issued  inconvertible 
notes,  without  providing  any  reserves  whatever,  it 
cannot  escape  the  charge  of  having  descended  to 
the  last  resort  of  a  bankrupt  Treasury;  and  this 
unwise  action  enormously  injured  the  credit  of  the 
United  States  and  increased  the  rate  at  which  it 
was  subsequently  forced  to  borrow.  There  is  only 
one  way  to  borrow:  that  is,  to  pay  the  price  fixed 
by  the  credit  of  the  borrower  in  the  open  market. 
From  this  there  is  no  appeal.  Indeed,  the  de- 
preciated paper  caused  to  the  Union  a  loss  of 
about  $500,000,000  in  the  creation  of  additional 

282 


GOVERNMENT   VS.  BANK  ISSUES 

debt  due  to  higher  prices,  speculation,  and  the 
diminished  amount  received  for  bonds  due  to  a 
damaged  credit.  In  no  way  can  the  facts  of  our 
experience  support  borrowing  by  issuing  forms  of 
money. 

(6)  C'est  le  premier  pas  qui  coute.  Once  a  false 
step  has  been  taken,  it  is  apt  to  lead  to  serious 
consequences.  The  very  existence  of  paper  issues, 
originating  in  a  wrong  method  of  borrowing,  is  a 
constant  menace.  The  mere  lapse  of  time  in 
which  no  injury  has  been  incurred  unfortunately 
serves  to  lull  the  fear  of  danger.  If  retained,  such 
issues  are  a  suggestion  for  similar  crude  expan- 
sions in  the  future,  when  men  are  too  excited  to 
judge  calmly  of  their  acts.  Their  very  presence 
is  an  incentive.  If  legislators  were  all  monetary 
experts,  and  never  influenced  by  political  con- 
siderations, there  would  be  little  risk  in  retaining 
for  a  time  our  greenbacks;  but  we  must  take  men 
as  they  are,  and  provide  for  the  probable  acts  of 
those  who  are  incompetent  and  ill-advised.  Ob- 
viously, these  national  guardians  of  our  monetary 
system  do  not  personally  lose  anything  when  they 
get  the  Treasury  into  desperate  straits;  they  have 
no  weight  of  responsibility  due  to  any  personal 
relation  to  the  issues — quite  differently  from  the 

283 


LATTER-DAY  PROBLEMS 

relation  of  bankers  to  bank  issues.  Humiliating 
as  it  may  seem,  the  maintenance  of  the  converti- 
bility of  greenbacks  into  gold  has  again  and  again 
been  imperilled.  The  whim  of  the  Executive,  or 
the  sudden  rise  of  an  unreasoning  campaign  cry, 
may  make  it  impossible  to  keep  the  slight  gold 
reserves  which  protect  our  standard  of  value  and 
prices.  As  yet  redemption  in  gold  as  against 
silver  is  largely  a  matter  of  the  personal  choice  of 
the  Executive.  All  in  all,  the  very  presence  of 
Government  issues  is  too  much  of  a  danger  to  be 
kept  forever  hanging  over  a  great  commercial 
nation. 

(7)  What  is  still  more  dangerous  is  the  fact  that 
the  whim  of  the  Government  is  the  only  limit  to 
its  issues.  Ordinarily,  sane  business  men  would 
concede  that  the  quantity  of  the  media  of  exchange 
should  bear  a  direct  relation  to  the  amount  of 
exchanging  to  be  done.  In  the  case  of  Govern- 
ment issues,  the  quantity  as  well  as  the  quality 
depend  on  a  vote  of  Congress.  If  a  fancied  need 
presses  upon  men  inexperienced  in  monetary 
operations,  especially  if  they  have  been  inoculated 
with  the  fallacy  that  the  more  money  a  country 
has  the  better,  there  will  be  excessive  issues,  fol- 
lowed by  raids  on  the  reserves.  The  paper  will 

284 


GOVERNMENT   VS.  BANK  ISSUES 

depreciate — and  the  country  will  undergo  rapid 
fluctuations  in  prices,  an  unsettling  of  contracts, 
a  period  of  mad  speculation,  leading  to  the  in- 
evitable ruin  of  a  commercial  crisis.  These  are 
not  matters  of  imagination:  they  are  only  mild 
descriptions  of  what  the  country  actually  suffered 
from  1862  to  1879  because  of  Government  issues. 
The  crisis  of  1873  is  directly  traceable  to  the 
speculation  inherent  in  the  fluctuating  greenback 
standard  which  followed  the  Civil  War. 

(8)  Naturally  enough,  false  doctrines  expressed 
in  Government  action  poison  the  whole  course  of 
public  opinion  for  generations  to  come.  There 
was  the  idea  that  a  Government  stamp  creates 
value.  If  so,  why  did  its  solemn  promises  to  pay, 
although  made  a  full  legal  tender,  depreciate  to 
35  cents  on  the  dollar?  Then  came  the  fallacy 
that  the  more  money  the  more  wealth;  as  if  wealth 
came  into  existence  by  increasing  the  counters. 
Again,  because  paper  was  depreciating  and  prices 
were  soaring,  the  conviction  grew  that  prosperity 
comes  with  increasing  the  quantity  of  paper 
money.  The  fact  was,  the  prices  rose  to  keep  up 
with  the  depreciation  of  the  standard.  And,  far 
and  wide  has  the  belief  spread  to-day — coming 
down  from  the  days  of  the  depreciated  greenback 

285 


LATTER-DAY  PROBLEMS 

— that  prices  depend  upon  the  quantity  of  money 
in  circulation.  Thus  the  ground  was  prepared 
for  the  silver  agitation;  on  the  theory  that  gold 
was  insufficient  in  quantity.  This  whole  brood  of 
heresies  is  traceable  to  the  crude  conceptions 
which  led  Congress  to  attempt  to  borrow  by  issu- 
ing inconvertible  paper  in  1862. 

m 

If  judgment  be  given  against  Government  is- 
sues on  the  grounds  thus  presented,  we  are  next 
forced  to  weigh  the  claims  for  and  against  the  only 
other  alternative  instrument  to  be  used  as  paper 
money — bank-notes. 

(i)  There  has  come  down  to  us  from  the  State 
banking  orgies  before  the  Civil  War,  as  well  as 
from  the  period  of  depreciated  greenbacks,  a 
belief  that  the  right  to  issue  money  gives  to  the 
issuers  the  power  to  control  the  money  market; 
to  put  prices  of  goods  and  securities  up  and  down; 
and  even  to  bring  on  panics.  The  "money  oc- 
topus" is  supposed  to  work  through  the  issues  of 
banks,  and  to  wish  to  confine  the  sole  right  of 
issue  to  the  banks.  The  problem  we  are  here 
discussing  has  nothing  to  do  with  inconvertible 
paper  of  changing  value.  The  real  issue  is  be- 

286 


GOVERNMENT  VS.  BANK  ISSUES 

tween  Government  issues  and  bank  issues — each 
convertible  into  gold.  Issues  of  either  kind  of 
money,  if  kept  redeemable  in  gold,  would  have  no 
greater  effect  on  prices  than  gold  itself  would  have. 
The  only  way  in  which  the  "money  power" 
can  control  prices  and  securities  is  by  obtaining 
control  over  capital  and  purchasing  power,  and 
thus  influencing  the  demand.  This  purchasing 
power  can  be  had  by  loans  from  banks.  The  pith 
of  the  matter,  then,  lies  in  the  ability  to  get  loans. 
Now,  suppose  the  "high  financiers"  have  got  the 
loans,  where  do  the  bank  issues  come  in?  No- 
where. When  a  loan  is  given,  the  borrower's 
deposit  account  is  credited  with  the  amount. 
Then  payments  are  made,  especially  in  all  large 
transactions,  by  checks  on  these  deposit  accounts. 
No  bank-notes  to  speak  of  are  used.  It  would 
be  an  inconvenience  to  the  borrowers  to  be  forced 
to  take  the  bank's  notes;  and  as  the  profit  to  the 
bank  arose  from  the  discount  on  the  loan,  that 
profit  is  realized  just  the  same  whether  the  bank 
gives  a  deposit  and  checking  account  or  whether 
it  gives  its  own  notes.  The  National  City  Bank  of 
New  York,  the  largest  bank  in  this  country,  has 
loans  of  $135,405,002,  but  it  issues  only  $9,217,497 
of  notes.  All  the  largest  city  banks  have  made 

287 


LATTER-DAY  PROBLEMS 

their  profits  and  accumulated  huge  surpluses  by 
use  of  checks  on  deposits,  and  with  very  little  use 
of  their  note  issues.  The  same  is  clearly  seen  in 
the  accounts  of  the  Banking  Department  of  the 
Bank  of  England.  Quite  apart  from  the  Issue 
Department,  it  does  the  main  banking  work  of 
the  greatest  financial  centre  in  the  world  by  the 
use  of  checks  drawn  on  deposits. 

(2)  There  may  be  many  persons — of  the  Upton 
Sinclair  type — who  really  think  that  banks  may 
wish  to  bring  on  panics.  A  bank  is  ex  natura  so 
placed  that  to  bring  on  a  panic  would  bring  on  its 
own  destruction.  Every  one  knows  that  in  the 
liabilities  of  a  bank  account  appear  the  items  in- 
dicating its  obligation  to  shareholders  for  the 
capital,  surplus,  and  profits,  as  well  as  the  items  of 
deposits  indicating  its  obligations  to  depositors  for 
the  sums  left  with  the  bank  which  may  be  drawn 
on  demand.  On  the  other  hand,  the  bank  lends 
its  resources — whether  coming  from  capital  or 
deposits — and  receives  as  its  only  security  assets 
from  whose  recurring  maturity  its  loans  are  repaid. 
If  these  assets,  such  as  collateral  composed  of 
stocks  and  bonds,  or  paper  based  on  the  sale  of 
goods,  should  lose  their  basis  of  value,  the  banks 
would  lose.  They  have  already  given  the  borrower 

288 


GOVERNMENT  VS.  BANK  ISSUES 

the  right  to  draw,  and  they  get  repayment  by  the 
borrower  only  in  the  future.  Hence,  the  only 
chance  of  the  bank  to  regain  what  they  have 
parted  with  lies  in  the  possibility  that  the  assets 
will  retain  value  enough  to  cover  the  loans  already 
made.  To  suppose,  therefore,  that  the  banks 
should  ever  have  a  motive  for  bringing  on  a  panic 
would  be  like  supposing  that  a  sailor  afloat  on  the 
ocean  in  an  open  boat  would  have  a  motive  for 
punching  a  hole  in  the  bottom  of  the  boat — the 
only  thing  which  saves  him  from  destruction. 

(3)  The  popular  supposition  that  the  bankers 
gain  a  special  profit  by  the  issue  of  notes,  which  by 
right  should  go  to  the  Government,  is  doubtless 
wide-spread.  In  truth,  there  is  per  se  no  banking 
profit  except  that  arising  from  the  discount  on 
loans;  and  since  discounting,  or  lending,  can  go 
on  without  issuing  notes — as  is  seen  at  all  banks 
and  trust  companies  organized  under  State  laws 
— then  it  is  patent  that  the  profit  of  banking  is  not 
due  to  the  issue  of  notes.1 

1  For  the  sake  of  brevity  and  clearness,  I  omit  the  claim  that  a 
national  bank  depositing  bonds  to  secure  its  notes  gets  a  profit 
both  on  the  bonds  and  on  the  notes  when  issued.  In  reality, 
other  things  being  equal,  a  bank  which  stays  out  of  the  national 
system  can  make  more  profit  than  one  in  it.  If  each  have  the 
same  reserve  of  $100,000,  it  would  support  $400,000  of  loans  on 

280 


LATTER-DAY  PROBLEMS 

(4)  Yet,  even  if  it  were  desirable  to  have  the 
banks  issue  the  paper  money,  it  has  been  claimed 
that  the  banks  would  be  unable  to  issue  enough 
money  for  the  enormous  trade  of  so  great  a  com- 
mercial country  as  this;  and  consequently,  the 
Government  is  the  only  authority  competent  to 
meet  so  great  a  task.  Those  who  think  thus  over- 
look the  patent  fact  that  (omitting  gold)  the  note 
issues,  either  of  a  government  or  a  bank,  are  not 
much  used  in  actual  transactions  of  any  impor- 
tance. In  fact,  payments  are  usually  made  by 
checks.  Therefore,  the  service  to  be  performed 
is  not  that  coterminous  with  our  trade,  but  a  ser- 
vice coterminous  with  those  retail  and  minor  trans- 
actions in  which  buying  and  selling  are  closed 
only  by  the  passage  of  some  form  of  coin  or  paper 
money.  We  may  need  cash  for  buying  a  railway 

a  25-per-cent.  reserve;  and  the  profit  would  be,  say,  6  per  cent, 
on  $400,000  in  case,  as  of  a  State  bank,  no  notes  were  issued. 
But  if  the  bank  went  into  the  national  system,  and  if  its  borrow- 
ers called  for  notes  when  a  loan  was  made,  then  the  whole  reserve 
must  go  for  bonds  which  at  best  would  support  less  than 
$100,000  of  notes.  Thus  its  loans  would  be  limited  to  less  than 
$100,000,  and  its  gains  would  be  restricted  to  6  per  cent,  on  that 
sum,  with  a  small  interest  on  the  bonds.  If  it  had  sufficient 
discount  business,  the  bank  could  earn  much  more  outside  than 
in  the  national  system,  and  wholly  without  the  issue  of  a  single 
note. 

290 


GOVERNMENT  VS.  BANK  ISSUES 

ticket,  but  not  for  buying  a  cargo  of  wheat.  It  is 
the  banks  which  supply  a  deposit-currency,  off- 
setting checks  at  clearing  houses,  by  which  in  the 
United  States  over  $150,000,000,00x3  of  goods  per 
year  are  exchanged,  and  without  recourse  to  silver, 
gold,  bank-notes,  or  greenbacks,  except  for  settling 
small  balances. 

IV 

When  we  come  to  positive  arguments  in  favor 
of  assigning  to  banks  the  duty  of  issuing  the  notes 
needed  by  the  trade  of  our  country,  we  are  obliged 
to  ask:  What  other  institutions  than  banks  exist 
which  can  know  when  and  for  how  much  a  demand 
exists  for  notes  in  transactions  which  cannot  be 
performed  by  checks?  Certainly,  Congress  can- 
not know.  Whether  we  like  banks  or  not,  the  fact 
is  that  they  are  the  institutions  of  credit,  evolved 
by  centuries  to  serve  the  needs  of  trade;  and 
whether  they  like  it  or  not,  the  banks  must  satisfy 
these  needs,  or  cease  to  exist.  Through  them  idle 
and  new  funds  pass  into  the  hands  of  producers; 
they  disburse  capital;  and  they  alone  can  know 
in  just  what  way  the  public  wish  the  capital  trans- 
ferred to  it — whether  through  the  medium  of  gold, 
silver,  paper  money,  or  checks.  In  this  respect 

291 


LATTER-DAY  PROBLEMS 

the  bank  is  the  slave  of  the  business  public.  If 
the  public  wish  only  a  deposit  account,  the  banks 
provide  it;  if  they  wish  notes,  the  bank  must  give 
notes. 

(5)  If  such  be  the  case,  the  banks  are  the  only 
organizations  which  can  provide  an  elastic  cur- 
rency.   We  have  seen  that  the  Treasury  cannot 
do  it.    As  a  matter  of  fact,  the  greenbacks  have 
been  rigidly  limited  since  1878.    Although  the 
present  bond  circulation  of  the  banks  can  never 
be  anything  but  inelastic,  since  the  amount  of 
notes  is  made  to  depend  upon  the  price  of  bonds 
and  the  rate  of  interest,  the  banks  can  be  given  a 
safe  method  of  issues,  quickly  redeemable,  such  as 
would  provide  the  necessary  seasonal  elasticity 
not  possible  with  Government  issues — elasticity, 
of  course,  which  contracts  as  well  as  expands. 
Leaving  the  elasticity  to  the  banks  is  the  only 
democratic  way.    There  could  be  no  over-issues 
under  a  system  which  provides  for  easy  redemp- 
tion of  bank-notes  at  many  centres;    and  they 
would  go  out  only  when  there  was  a  need,  such 
for  instance  as  arises  in  the  autumn  harvests. 

(6)  Far  different,  however,  from  this  seasonal 
elasticity  is  the  demand  for  elasticity  in  a  time  of 
crisis.    In  such  a  crisis  as  that  of  1907,  when  an 

292 


GOVERNMENT  VS.  BANK  ISSUES 

antecedent  expansion  of  speculation,  undue  rise 
of  prices,  and  reckless  promotions,  had  paved  the 
way  for  disaster,  an  elastic  currency,  although  it 
could  not  have  prevented  the  panic,  would  yet 
have  in  a  great  measure  modified  the  severity  of 
the  crisis.  In  times  of  emergency  such  as  this, 
instant  response  to  the  need,  and  at  the  spot  where 
the  need  exists,  could  have  been  made  only  by 
banks  to  their  borrowers.  Treasury  expansion, 
publicly  advertised,  would  have  been  a  certain 
means  of  frightening  depositors  and  borrowers, 
and  would  have  aggravated  the  disaster. 

(7)  It  being  understood  that  convertibility  into 
gold  is  the  prime  requisite  either  of  Government 
or  bank  issues,  it  is  appropriate  to  note  that  the 
cost  of  maintaining  coin  reserves,  which  we  found 
to  be  so  heavy  in  the  case  of  the  greenbacks,  would 
be  removed  from  the  people  and  put  wholly  upon 
the  banks,  were  the  latter  to  be  required  to  furnish 
the  notes.  In  truth,  the  banks  would  never  have 
any  real  difficulty  in  maintaining  gold  payments, 
provided  the  Government  preserved  the  gold  stand- 
ard and  redeemed  its  own  obligations  in  gold. 
The  national  bank-note  has  from  the  beginning 
always  been  as  good  as  the  Government  note  into 
which  it  was  convertible;  and  the  most  significant 

293 


LATTER-DAY  PROBLEMS 

thing  in  this  result  is  that  the  national  bank-notes 
have  not  been  and  are  not  now  a  full  legal  tender. 
Clearly  enough,  more  depends  on  redeemability 
than  on  legal  tender. 

(8)  If  the  Government  at  any  time  needs  gold 
it  has  to  go  to  the  banks  or  to  allied  institutions 
to  get  it.    But  if  the  banks  were  delinquent  in 
maintaining  redemption,  have  we  any  means  of 
compulsion  to  keep  them  up  to  the  mark?    In 
this  respect  the  bank  certainly  occupies  a  better 
position  than  the  Government.    A  bank  failing  to 
redeem  can  be  immediately  sued  in  the  courts, 
and  can  be  obliged  to  keep  its  promises  or  go  into 
liquidation.    Not  so  with  the  Treasury.    If  the 
Treasury  ceases  to  redeem  it  cannot  be  compelled 
to  fulfil  its  obligations  against  its  own  consent. 
Only  if  Congress  permits,  can  the  holder  of  its 
note  proceed  against  the  Government  for  failure 
to  redeem.    For  seventeen  years,  1862-1878,  the 
Government  was  in  fact  derelict  in  paying  coin,  and 
was  able  to  do  so  with  impunity.    The  great  wealth 
of  the  country  did  not  save  us  from  this  ignominy. 

(9)  Yet  the  opinion  is  prevalent  that  the  whole 
wealth  of  the  nation  lies  behind  the  Government 
paper,  for  which  the  credit  of  the  country  is 
pledged.    Therefore    Government  issues   would 

294 


GOVERNMENT  VS.  BANK  ISSUES 

have  a  greater  safety  than  those  of  banks.  To 
this  it  might  be  said  that  no  boy  should  be  without 
apples  as  long  as  there  are  trees  full  of  apples  in 
well-guarded  enclosures.  There  are  the  apples; 
but  the  boy  does  not  own  them.  How  can  he  get 
what  he  does  not  own  ?  Similarly,  the  great  wealth 
of  the  country  is  not  owned  by  the  State;  and  the 
State  can  take  that  wealth  only  by  the  forms  of 
law  which  permit  its  acquisition  by  taxation  or 
borrowing.  It  cannot  steal.  Then,  if  there  is  no 
limit  to  taxation  and  borrowing,  say  Government 
paper  advocates,  the  State  can  always  secure  gold 
enough  to  maintain  its  paper  at  par.  But  men 
do  not  always  do  what  they  ought  to  do.  And  if 
there  is  boundless  wealth,  but  if  none  of  it  is  taken 
to  secure  the  paper,  the  great  wealth  of  the  coun- 
try adds  no  more  value  to  the  paper  than  a  sum- 
mer's crop  of  thistledown.  Moreover,  the  Treasury 
may  have  reached  its  limits  of  taxation  and  bor- 
rowing by  expenditures  for  war,  or  for  things 
other  than  the  paper  money.  And  since  it  cannot 
be  required  by  court  procedure  to  redeem  its 
money,  if  it  wishes  not  to  redeem,  then  it  is 
clear  that  the  character  of  the  paper  is  depend- 
ent not  on  the  wealth  of  the  country,  but  on  the 
whims  of  Congress  to  whom  the  currency  is  subject. 

295 


LATTER-DAY  PROBLEMS 


The  case  is  even  more  favorable  for  the  banks 
than  this.  Apply  to  Government  paper  the  same 
test  as  that  applied  to  bank-notes.  If  a  bank 
issues  its  notes  as  the  result  of  a  loan,  it  must  re- 
ceive assets  in  the  form  of  securities  as  an  equiva- 
lent. Indeed,  the  quality  of  such  assets  is  con- 
stantly brought  into  discussion.  A  skeleton  ac- 
count of  a  new  bank  would  show  the  situation: 


LIABILITIES 

ASSETS 

Capital  $100  ooo 

Loans  

$400,000 

Reserves  ........ 

100,000 

Here  the  issue  of  notes  is  followed  ipso  facto  by 
the  receipt  of  an  amount  of  assets  sufficient  to 
secure  the  repayment  of  the  loans.  With  this 
compare  the  operations  of  the  Treasury: 


UABILIT 

IES 

ASSETS 

Capital  
Notes  

$  

4OO  OOO 

Securities  (for  notes)  .  . 
Reserves   (perhaps)  .  .  . 

$  

IOO  OOO 

By  the  very  nature  of  a  government,  it  does  not 
receive  collateral  when  it  issues  notes.  It  is  not 
a  bank.  It  does  not  get  assets  which  equal  the 
sum  of  note  issues.  As  a  rule,  what  the  Govern- 
ment gets  for  the  notes  when  issued  is,  as  in  the 

296 


GOVERNMENT  VS.  BANK  ISSUES 

buying  of  munitions  of  war,  consumed,  or  made 
unavailable  as  an  asset  of  value.  And  the  scrap- 
ing up  a  gold  reserve  is  regarded  as  a  very  virtuous 
deed.  Now  a  bank  which  took  the  assets  re- 
ceived for  its  notes  and  used  them  up  would  be 
jeered  out  of  existence.  But  if  the  directors 
spent  the  $400,000  of  the  bank's  assets  in  cham- 
pagne suppers,  they  would  still  have  much  the 
same  protection  for  the  notes  as  the  Treasury. 

In  truth,  bank-notes  can  be  made  as  safe  as  any 
kind  of  money  by  proper  rules  as  to  guaranty 
funds,  lien  on  assets,  and  the  like.  The  Treasury, 
on  the  other  hand,  is  little  likely  to  submit  to 
shackles  which  are  easily  imposed  on  a  bank. 

(10)  Since  the  quality  of  the  Government  paper 
is  not  really  maintained  by  the  wealth  of  a  country 
— any  more  than  the  thirst  of  a  prisoner  in  a  dun- 
geon is  slaked  from  the  cool  lake  he  sees  outside — 
it  is  obvious  that  the  value  of  the  paper  is  deter- 
mined by  the  action  of  a  Congress  usually  made 
up  of  active  politicians.  In  short,  Government 
notes  are  at  the  mercy  of  every  passing  whim  of 
the  voters,  whom  the  politicians  sedulously  court. 
Money  should  be  left  to  experts;  but  in  fact  Gov- 
ernment paper  never  can  be  so  left,  as  long  as  it  is 
the  plaything  of  politics.  That  is  the  curse  of  all 

297 


LATTER-DAY  PROBLEMS 

Government  issues  of  notes,  just  as  it  is  the  curse 
of  custom  duties  which  are  made  political  issues. 
Therefore,  the  strongest  possible  reason  for  rele- 
gating the  system  of  paper  issues  to  the  banks, 
under  general  rules  fully  providing  for  elasticity 
and  safety,  is  that  they  would  be  entirely  removed 
from  politics.  If  no  other  argument  were  pre- 
sented, this  one  alone,  judging  not  by  theory  but 
by  actual  experience,  should  be  sufficient  to  induce 
us  to  decide  in  favor  of  bank  issues.  And  this 
conclusion  seems  to  have  been  already  reached  by 
those  great  commercial  nations  which  are  our 
closest  rivals  for  the  trade  of  the  world. 

Thus,  in  the  great  case  of  Government  vs. 
Bank  Issues  before  the  people,  the  jury  ought  to 
find  in  theory  and  in  fact  in  favor  of  the  Bank 
Issues.  Such  a  finding  would  be  a  protection 
against  arbitrary  party  action  by  a  central  govern- 
ment under  mere  political  pressure  and  in  line 
with  the  democratic  tendencies  of  the  age. 


INDEX 


Addams,  Jane,  114. 
Anarchism,  60-61. 
Armstrong,  General,  67. 
Atcbison,  Topeka  and  Santa  F£ 
Railway,  195. 

Bank  issues,  note-holder,  as 
different  from  depositor,  211, 
212;  bad  banking  denned, 
230;  inspections  of  banks, 
232;  inspection  by  clearing 
house  associations,  233;  quasi- 
public  function  of  banks,  243; 
reserves,  cost  of  keeping,  276, 
293;  uniformity  of  note  issues, 
279;  constitutionality  of,  280; 
supposed  to  give  control  over 
money  market,  286;  banks  not 
gain  from  panics,  288;  bank- 
notes, no  special  profit  from, 
289;  banks,  capacity  of,  for 
issuing  sufficient  notes,  290; 
banks  alone  know  amount 
notes  needed,  291;  elasticity 
possible  only  under  banks, 
in  time  of  crisis,  292,  293;  re- 
demption can  be  enforced  on 
banks,  but  not  on  govern- 
ment, 294. 

Barnett,  Samuel,  91,  92,  93. 

Capital,  law  of  increase  of,  126- 
128;  and  capitalism  distin- 
guished, 137-138. 

Capitalization  of  earnings,  proper 
for  monopolies,  178. 


Carnegie,  178,  179,  180. 

Character,  affects  industrial  effi- 
ciency, 84;  and  wages,  149- 
150;  and  economic  improve- 
ment, 151-153. 

Christianity  a  test  of  economics, 
120-121;  aids  saving,  123-128. 

Collective  bargaining,  4,  22;  lim- 
itations of,  6. 

Competition,  opposed  by  social- 
ists, 28;  disadvantages  of,  52. 

Consumers'  leagues,  65-66,  71. 

Convertible  paper,  saving  by, 
274;  tested  by  experience, 
274-275. 

Co-operation,  65. 

Denison,  Edward,  93. 
Depositors.     See   Guaranty   of 

Deposits. 
Distribution,  laws  of,  examined, 

134-148. 

Economics  and  experience  both 
needed  for  social  work,  100. 

Ethical  code  of  workers  and  em- 
ployers, 1 1 6. 

Ethics  related  to  economics,  117. 

Experience  not  sufficient  guide 
for  action,  98-99. 

Farming,  suggested  industry  for 
city  poor,  74. 

Foreign  trade,  promoted  by  in- 
creased efficiency  of  labor,  23; 
an  incentive  to  civilization,  70. 


299 


INDEX 


Fortunes,  large,  hostility  to,  155; 
often  imply  large  service,  165, 
168;  wrongly  acquired,  170- 
171;  viciously  used,  171-172; 
well  used,  172;  regulation  of 
accumulation  of ,  175. 

George,  Henry,  62,  63,  64,  198. 

Germany's  superior  technical 
schools,  79. 

Government  vs.  bank  issues, 
373;  a  loan  without  interest, 
278;  endless  chain,  277;  origi- 
nating in  borrowing,  283;  lim- 
it of  issues,  284;  errors  arising 
from,  286,  287;  not  secured  by 
wealth  of  nation,  294-297;  de- 
pendent for  value  on  action  of 
Congress,  297. 

Guaranty  of  deposits,  political 
treatment  of,  205,  239;  out- 
come of  1907  panic,  206; 
scheme  defined,  207,  210;  im- 
mediate redemption  impossi- 
ble, 208,  234,  247;  and  savings 
banks,  208;  justice  of,  215,  242, 
251;  socialistic,  216,  261;  bank 
deposits,  only  one  form  of 
credit,  not  money,  213,  218, 
219,  226;  and  panics,  218,  220, 
223,  229,  263-265;  depositor's 
safety  depends  on  assets,  and 
management,  219,  222,  223, 
230,  231,  240;  runs  best  met 
by  reform  of  note  issues,  225, 
226-228;  insurance  hazard  for 
deposits,  233,  259;  insurance 
of  banks  against  bad  loans, 
243;  historical  experience,  236; 
depositors,  privileges  of,  241; 
fundamental  error  of,  244; 
now  exists,  245-247,  260;  ab- 
solute security  impossible,  249, 


250;  would  not  prevent  bad 
loans,  253,  254,  260;  would 
encourage  unsound  banking, 
255,  256;  how  affects  relation 
of  national  and  state  banks, 
266-268;  relation  to  emergency 
circulation,  270. 

Heinze-Morse,  224. 
Hirsch,  Baron,  165-166. 
Hughes,  Gov.,  203. 

Industrial  education,  78-79;  and 
unions,  24;  partial  solution  of 
problem  of  the  poor,  74. 

Interest,  why  paid,  136-139; 
tendency  to  fall,  142-144. 

Knapp,  M.  A.,  200. 
Knickerbocker  Trust  Co.,  235. 

Labor,  productivity  of,  15,  16, 
19;  community  of  interest  of, 
and  employer,  22;  competi- 
tion between  different  labor- 
ers, 51. 

Labor  legislation,  in  interest  of 
unions,  12;  in  aid  of  wages, 
105,  107. 

Labor  unions,  based  on  monopoly 
4,  6,  8,  13;  limited  in  member- 
ship, 5,  65;  discrimination  of, 
against  non-union  men,  8-9; 
maintain  monopoly  by  force,  9; 
ethical  code  of,  9;  oppose 
doctrine  of  equal  rights,  10; 
and  political  influence,  11-12; 
interference  of,  with  employ- 
er's management,  13,  14. 

Land,  nationalization  of,  62; 
would  not  help  the  poor,  63-64. 

Land  ownership,  based  on  social 
utility,  135-136. 


INDEX 


La  Salle,  156,  157,  159,  160. 
Loyola,  93. 

Malthus,  T.  R.,  131. 
Managerial  ability,  necessary  in 

industry,  160-161;  earns  large 

wages,  163. 
Marx,  Karl,  47,  113. 
Mill,    John    Stuart,     63,     122, 

126. 

Milwaukee  Ave.  Bank,  214. 
Monetary  functions  separate  from 

fiscal,  281-282. 
Monopoly,    artificial,    basis    of 

labor  unions,  4,  6,  8;  natural, 

of  skilled  labor,  18. 

Note  issues.  See  Government 
Issues  and  Bank  Issues. 

Oklahoma  experiment,  257-359. 

Parkman,  156. 

Peabody,  George,  172-173. 

Population,  law  of,  129-134;  and 
standard  of  living,  133-134. 

Postal  savings  scheme,  209,  268, 
269. 

Poverty,  problem  of,  and  indus- 
trial education,  74;  require- 
ment for  solution,  76;  as  at- 
tacked by  social  settlements, 
96. 

Private  property,  opposed  by 
socialists,  28,  47;  the  will  of 
the  race,  43;  judged  by  re- 
sults, 43-44;  disadvantages  of, 

44-45- 

Production,  laws  of,  examined, 
126-138. 

Profit-sharing,  65. 

Psychology  as  related  to  eco- 
nomics, 71-72. 


Rae,  158. 

Railways.     ilSee    Valuation    of 

Railways. 
Ripley,  E.  P.,  195. 
Roosevelt,  President,  198. 

Salvation  Army,  method  of  deal- 
ing with  poverty  problem,  73. 

Saving,  promoted  by  Christianity, 
123-128;  necessary  for  capi- 
tal, 126-127. 

Self-sacrifice,  Christian  and  eco- 
nomic virtue,  123-128. 

Smith,  Adam,  122. 

Social  reform  as  related  to  eco- 
nomics, 48-49. 

Social  settlements,  origins  of,  92; 
their  aims  and  methods,  93-96; 
have  no  organized  strategy, 
97-98;  qualifications  of  di- 
rectors, 103-104;  affect  stand- 
ard of  living,  107-108;  test 
principles,  no;  and  socialism, 
ii i;  and  immigrants,  112; 
and  organized  charity,  119; 
what  they  can  accomplish,  119. 

Socialism,  primarily  idealistic, 
35;  and  yet  materialistic,  26, 
39;  opposes  competition  and 
private  property,  28;  claims 
distribution  unjust,  30-31;  im- 
practicable without  change  in 
human  nature,  33-34;  cannot 
banish  inequalities,  34-35;  rad- 
ical weakness,  36;  a  philoso- 
phy of  failure,  37-38;  opposes 
private  property,  47;  no  uni- 
form programme  of,  48;  has  not 
been  useless,  55;  and  social 
settlements,  in. 

Standard  of  living,  promoted  by 
efficiency,  21;  and  population, 
I33-I34- 


301 


INDEX 


State   interference,    maxim   for, 

54- 
Surplus  value,  49. 

Toynbee,  Arnold,  101,  108. 
Toynbee  Hall,  92,  93,  108,  109. 

Unearned  increment,  46. 

Valuation  of  railways,  commer- 
cial, 181,  183,  196,  197;  physi- 
cal, 181,  183,  198,  200,  202; 
independent  of  rates,  199,  200; 
earnings  due  to  franchises,  184, 
190,  195,  197;  meaning  of 
franchises,  187;  railway,  mo- 
nopoly situation  of,  185;  risks 
of  investment  in  a  railway,  186; 
the  unearned  increment  of  a 
railway,  188,  189;  railway  and 
the  farmer,  188-191;  railway 
rates  vary  inversely  with  valu- 
ation, 192,  198;  conditions 
affecting  rates,  201;  railway 
earnings  in  relation  to  mana- 


gerial ability,  192-196,  198; 
railways,  overcapitalization  of, 
196,  202;  railway  discrimina- 
tions, 200;  taxation  of  railways, 
203. 
Vanderbilt,  Cornelius,  166-167. 

Wages,  affected  by  productivity 
of  labor,  16,  19,  23,  75,  85;  of 
skilled  labor,  18;  the  largest 
share  in  distribution,  50;  of 
women,  79, 152;  aided  by  legis- 
lation, 105,  107;  determined 
by  supply  and  demand,  106; 
of  management,  141;  and 
character,  149-150. 

Want,  human,  a  stimulus  to  pro- 
duction, 67. 

Wants  of  poor  should  be  en- 
larged, 68;  should  be  im- 
proved, 69. 

Washington,  Booker  T.,  67. 

Wealth,  inequality  of,  causes  dis- 
content, 57-58;  gives  chance 
for  socialism,  59. 


302 


BY     J.     LAURENCE     LAUGHLIN 

Professor  of  Political  Economy  in  the  University  of  Chicago 

The  Principles  of  Money 

8vo,  $3.00  net 

"  You  have  laid  the  public  under  very  great  obligation  by 
creating  such  a  work  and  placing  it  within  their  reach.  It 
deals  with  principles,  and  will  be  a  text-book  and  fountain 
source  from  which  information  and  inspiration  can  be  obtained." 
—A.  P.  HEPBURN,  Vice-President  Chase  National  Bank, 
New  York. 

"  One  of  the  clearest  and  most  logical  of  the  present-day 
writers  on  economic  subjects,  and  one  whose  works  can  be 
read  with  most  interesting  profit  by  the  most  ordinary  man  of 
business." — Journal  of  Commerce. 

"  His  exposition  being  addressed  to  laymen,  they  will  find 
in  his  book  wonderfully  comprehensive  assembling  of  the 
essential  literature  bearing  on  the  subject.  His  discussion  on 
price  table  is  particularly  full  and  satisfactory." 

—New  York  Globe. 

"  To  a  banker  it  will  prove  invaluable ;  to  the  layman  it 
will  act  as  a  teacher,  and  to  both  classes  it  will  be  found  to  be 
an  educator  of  great  value." — The  Financier. 

"  A  valuable,  informing,  able  and  lucid  written  book.  .  .  . 
Professor  Laughlin  is  as  acute  as  he  is  sound  and  progressive. 
Moreover,  his  contributions  to  scientific  finance  in  these  divi- 
sions of  work  are  of  great  practical  significance." 

— Chicago  Evening  Post. 

CHARLES  SCRIBNER'S  SONS.  NEW  YORK 


BY     J.     LAURENCE     LAUGHLIN 

Professor  of  Political  Economy  in  the  University  of  Chicago 

Industrial  America 

Berlin  Lectures  of  1906 
I2mo,  $1.25  net 

"  The  topics  touched  are  pregnant  with  present  and  future 
interest." — New  York  Times. 

"  Professor  Laughlin  is  to  be  heartily  thanked  for  the  publica- 
tion of  these  admirable,  enlightening  and  informing  essays.  .  .  . 
He  has  given  us  a  healthy,  instructive  book." — Chicago  Post. 

"A  lucid  statement  of  the  current  situation  in  the  local 
fields  of  industry." — San  Francisco  Chronicle. 

"  His  book  will  prove  to  have  as  much  interest  for  Americans 
who  are  not  systematic  students  of  economics  as  it  had  for  the 
Germans  whose  eyes  he  planned  to  open." 

— Chicago  Record-Herald. 

"A  lucid,  able  presentation  of  important  problems." 

— Interior. 

"  There  is  nothing  in  print  better  worth  the  attention  of 
American  readers  who  are  looking  for  explanations  of  those 
problems  at  once  clear,  calm,  and  of  moderate  compass." 

— Journal  oj  Political  Economy. 

CHARLES  SCRIBNER'S  SONS,  NEW  YORK 


THE  LIBRARY 
UNIVERSITY  OF  CALIFORNIA 

Santa  Barbara 


THIS  BOOK  IS  DUE  ON  THE  LAST  DATE 
STAMPED  BELOW. 


UC  SOUTHERN  REGIONAL  LIBRARY  FACILITY 


A     000864103     7 


